Have Home Equity, But Banks Won’t Lend to You? Here is What to Do
Accessing home equity is a popular debt consolidation method, but new Canadian mortgage regulations are making that more difficult to do.
Under Canada’s new mortgage rules, homeowners who want to undertake mortgage refinancing must qualify according to higher stress-test rates, rather than the existing contractual mortgage rate.
For example, say you bought a $400,000 home at a five-year, fixed-rate mortgage, with a 3.3% rate. You have $100,000 left on your mortgage and you want to borrow $50,000 based on your home equity.
Before the new mortgage rules came into effect, your lender would have made sure you could handle the $150,000 loan (your remaining mortgage plus the additional $50,000) at your existing mortgage rate of 3.3%.
However, as of January 1, 2018, your lender will make sure that you can take on a $150,000 loan at 5.3%, not 3.3%, based on the new Canadian mortgage rules because big banks need to stress-test you by adding two points to the current “benchmark rate” when you apply. This can also make it tougher to qualify for a home equity line of credit (HELOC).
So, even if you have 15-to-20% home equity available, it may represent a lot of money, but it could still not be enough for refinancing.
When they are stress-testing your home equity loan, lenders are also considering your gross debt service ratio (GDS), which is all of your housing-related debt, and your total debt service ratio (TDS), which is all of your debts. If these are deemed too high, it will be much harder to obtain a loan, even if you have home equity available.
If you have problematic debt that is hindering your ability to access home equity, it may be time to consider some other options.
One such alternative is filing for a Consumer Proposal.
When you file for a Consumer Proposal, a settlement offer is made to your creditors to accept a lower payment for your outstanding debts. A Consumer Proposal can include any unsecured debts, including unpaid credit cards, outstanding bills, certain lines of credit, and student loans that are more than seven years old.
A Consumer Proposal does not include secured debts, such as your mortgage or car loan, or family obligations, such as child support.
If you have a large amount of high-interest debt under $250,000 that can’t be paid off through budgeting, a Consumer Proposal may be your best option. Often with a Consumer Proposal, you can keep your house (as long as your mortgage payments are up-to-date) so you’ll have a better chance at accessing home equity.
The team at Fuller Landau Debt Solutions can help you consider all of your debt consolidation options, including accessing home equity and filing for a Consumer Proposal.
Call us today for a free consultation. Call 416-927-7200 or visit www.fullersolutions.ca.