As a mortgage broker I am often asked when is the best time for someone to apply for a LOC? Regardless of who is asking me or why, I always tell them the same thing: Best time would be to apply when you don’t need it. Huh, you say? Allow me to explain my rule of thumb.
The last thing you (or anyone else) want is to find yourself in a situation where a life emergency forces you to apply for line of credit at the very moment you need it most (an unexpected home repair, job loss or illness, for example). Instead, you are far better off getting one in place when your chances of qualifying are at their highest; that way, should you ever need it, you have an emergency exit that doesn’t require you to re-qualify.
During my career as a mortgage broker, almost every client that applied for the line of credit when they didn’t need it was happy they had it in place later on, and the reverse is true too. Planning ahead for blind spots is an essential strategy for anyone who wants to enjoy good financial health and one I have employed both personally and in my work.
APPLY FOR A LOC WHEN YOU DON’T NEED IT
This same strategy is at the heart of my advice to clients who wish to place a large down payment on a home. “Don’t bet the farm!” I tell them. Instead, I encourage clients who are lucky enough to have a substantial amount of liquid to invest in a home to apply for a HELOC (remember, the best time to apply is when you don’t need it) so that a portion of their equity can be re-advanceable. That way they are covered when it comes time to make a down payment for a new home or an investment property, have an unexpected repair or special levy come up, or hit a personal roadblock.
As a mortgage broker, we can only help clients get secured lines of credit. A secured line is one that is backed up by the security of the home. Because the loan is secured, it carries its own advantages including larger amount of credit, and lower rates. Most Canadians would be looking at Prime + 0.5% on a home equity line of credit.
By now you are probably thinking, HELOCs sound great, how can I get one? Well, in my opinion they only really make sense if you are putting more than 20% down for your primary residence. The actual HELOC can only go up to 65% of the value of home. The remaining 15% can be set up as a mortgage if clients want to position it that way. Most will get a mortgage for what they owe and get the remaining available funds as a line of credit so that it’s available to them to a cap of 80% of the value of the home.
GIVE YOURSELF SOME ROOM TO WIGGLE
As an example, let’s say that you have $200k in savings and wish to invest it in a property worth $500k. By laying down a $200k payment, your mortgage would be $300k which is incredible. Except that this approach leaves you with no extra wiggle room whatsoever. A more secure alternative would be to get a mortgage/HELOC combo going up to 80% of the value of your home. This would give you $100k available as a home line of credit. These funds can then be used to pay for special assessments or even contribute to RRSPs at the end of the year, allowing you to pay less in taxes while receiving a bigger refund.
Why GET IT WHEN YOU DON’T NEED IT?
The hard reality is that lenders want to give you money when everything is fine and your property is in good condition. This is all the more reason to apply for a HELOC at the same time you’re receiving your mortgage and aren’t required to pay for extra legal fees or additional appraisals. If you have been following the mortgage rules in the past couple of years you also know that as regulations become tighter, approvals become tougher.
INTEREST-ONLY PAYMENTS & NO PENALTY = : )
Lastly, a HELOC allows you to make interest-only payments when you’re carrying a balance, if there is no balance there is 0 costs. It also permits you to withdraw and deposit funds without penalty within a certain window of time, and it doesn’t require an annual fee.
Like every mortgage product a HELOC is not for everyone. But, if you are putting down a sizable down payment (20%++), it may be worth having the conversation with your broker to see if it can benefit you. Just make sure to apply before you need to send up an SOS signal.