Mortgage 101 – Benefits of HELOCs for Renovations

Todd Veinotte and Clinton Wilkins discuss the benefits of home equity lines of credit (HELOCs) for renovations and investments, noting rates from 5.2% to 6.2%.

Todd Veinotte
Welcome back to Mortgage 101, your guide to home ownership with myself, Todd Veinotte and, of course, Clinton Wilkins, mortgage guru. Clinton Wilkins, it’s spring, and this is a good time to renovate.

Clinton Wilkins
Sell your existing home, buy a new home, right? Spring is the best time.

Todd Veinotte
And you set my last mortgage up, I did with Scotiabank. I got some great advice on a variable rate. And you gave me a home equity line of credit, which I am using a portion of that right now because I’m ready to go renovate the bathroom. And at the time, who even knew you needed that? And it’s fantastic because it’s already embedded in the mortgage, in the house I’m paying. It’s a neat product because it goes on with your mortgage, you pay your variable rate, and it’s just so much better than paying out of your pocket, paying cash or paying from another line of credit total.

Clinton Wilkins
At a much lower rate, typically right now on a home equity line. The rates range from anywhere from 5.2 to 5.4 up to 5.7% so that’s typically where, some are as high as 6.2, so I would say anywhere from 5.2 to 6.2 is where our home equity line would be. The real big pro is kind of you hit the nail on the head, it’s available equity that’s tied to your home in terms of pulling down on a credit facility, but you only pay interest when you use it exactly. The nice thing is, with these home equity lines of credit, sometimes people will use them for investments, sometimes they’ll use them for renovations, and sometimes they’ll draw this debt down before using a credit card or before using an unsecured line of credit, because the borrowing cost is just so much less. And when you draw down on your home equity line, it’s an interest-only payment. But that being said, I don’t think they’re a forever plan, whether it’s a ManuLife one, whether it’s a Scotiabank, whether it’s a TD flex line, whether it’s RoyalBank home line plan. It’s not forever, really, if you draw it down and it ends up being long term debt, what we typically do is we can burn, we combine what’s on the home equity line with the mortgage debt renewal, and then start again, but maybe at that time you have that much more equity in your house, and we can increase the credit facility and give people a bigger home equity, lot of credit. I’m doing this every single day, and HELOCs, I think we’re popular in the 90s. There was a book written. It was called “The Smith Maneuver.” So it was about borrowing on your home investments, etc. But then the book kind of fell out of fashion for a while, but now, I would say, in the last five years, HELOCs have become even more popular, primarily because a lot of people have a lot of equity in their home. But they might not need to borrow today, but there is a future borrowing need, and it’s a great product. You know, Scotiabank has a great one. We’re great partners of Scotiabank, but we deal with a variety of other lenders as well, like Manulife and TD, that have a great home equity line of credit product as well. And different people’s needs are different, and the products are a little bit different between each one of them. But there are pros and cons. Some people can’t trust themselves having access to credit. And to be honest, Todd, you had 20,000 was pretty small one or whatever it was, 25,000, but sometimes I’m giving people $400,000 home equity lines of credit. I think that some people need to be disciplined. And I think some people in HELOCs should not be in HELOCs. And I can tell you, I see these clients, I bring them in, I pay them out, and I close them down. But responsible people like you.

Todd Veinotte
Yeah, it’s great. You often say, don’t use your house as an ATM.

Clinton Wilkins
Do not use your house as an ATM. Some people just refinance all the time, and even some of my clients, some of my clients refinance, and then sometimes I think they don’t come back because they feel ashamed. I found out about one today that ended up going to another financial institution, which doesn’t happen very often. When I found out that I lost them, I was a little bit shocked and saddened, because I have a long-term relationship with these people, and I would look back in their file and I’m like, they refinanced a lot. I think it just got to the point where they’re like, we feel bad and we don’t want to go back. I’d rather someone come to me and I give them the advice, because I probably would have said: “Okay, you need to do this. You need to do this, you need to do this. Let’s get you on track.” So I don’t know what kind of advice they get somewhere else, but I always say come to me. We have an open door. Email me. Call me, I’m always willing to talk through a scenario. I never want people to feel bad about their situation, my job. I always want to put people in the very best possible situation they can.

Todd Veinotte
So outside of if people need equity or cash or to do upgrades, is outside of a HELOC. What other options are there?

Clinton Wilkins
Sometimes people just do a straight refinance and that happens a lot at renewal, sometimes at that renewal, sometimes at midterm time. It just depends on people’s situation and a standard standalone mortgage is good for a lot of people. The people that would want to do this for improvements, they’re doing the work right away. The rate with a mortgage is going to be lower than it is going to be on a home equity line of credit. So if they need the money right away, sure do it as a standalone mortgage. I then sometimes, even if I do the standalone mortgage, I’ll still give them the home equity line if they don’t need all of the available equity, just so they have a fallback position. But if they need the money right away, put it with the mortgage, because that rate will be less.

Todd Veinotte
What percent of people who are qualifying for mortgages pay their mortgage and don’t default? It’s astronomically high numbers, like 99%?

Clinton Wilkins
And I mean, just throwing 99, it’s like, maybe it might be actually above 99. It’s a very high percentage. And the Canadian Bankers Association thought that we would see more defaults up to about a 4% range. We’ve not seen that. I think there are more arrears today than there were over COVID because there were so many programs. And that’s one thing that we need to be very cognizant of. Going into the tariff situation and seeing our economy go into recession, there can be more losses and more defaults. Ask for help before you get into a default situation.

Todd Veinotte
For CMHC, we pay a lot of money for these.

Clinton Wilkins
So anybody that buys a home, and they put down less than 20%, they need to have insurance from the Canadian Mortgage Housing Corporation. All three essentially do the same thing, and depending on the percentage you put down, you pay a premium to the insurance company, which is this body, but then that grants you access to getting a high ratio insured mortgage. The insurance is against the home or owner. It’s insurance to protect the bank from you: the borrower. The reason being is there’s not that much equity left in the property, so if the bank had to take the property back from you, the insurance company would cover the bank for any losses. But these insurance companies have a lot of really good programs in place as well that basically will help homeowners stay in their home if they’re having financial hardship. So if they try to work with someone, they can keep them in the home even if they’re having some financial challenges.

Todd Veinotte
So, if you want to avoid the CMHC or these, you need to put down 20%. How much money are we talking, does it cost for the SMH, CPA?

Clinton Wilkins
So for example, if you buy a standard house in Halifax, let’s say the standard house is $500,000 and you put down 5% which is the minimum down payment, the high ratio insurance premium based on a 25 year amortization or less, is 4% of the mortgage amount. So 4% on $475,000 Todd – is a good chunk of change. That’s $23,750 and if you’re a first-time homebuyer, or if you’re buying a newly constructed property, you can go up to a 30-year amortization, and that insurance premium is 4.2%, so it would be almost 20 grand, $19,950 if you did a 30-year amortization. So essentially, you’ve almost financed 100% of the house with the insurance premium in there.

Todd Veinotte
So the optimal situation would be to have 20% that.

Clinton Wilkins
Is the optimal now, there are a couple of other upsides from having a CMHC-insured mortgage, though, typically the rates are less and that kind of surprises people. Sometimes they’re like, well, if I’m putting down 20% I should get a lower rate than if I’m putting down 5%, no, because 5% is a lot less risky. After all, we have the insurance from CMHC agent or Canada guarantee from the bank, and they’re able to then offer you lower rates. Those mortgages can also be packaged and sold off in the Canadian mortgage bond, so the cost of funds is a lot less, right for a CMHC insurance.

Todd Veinotte
It would be a numbers game. Then I guess you would have to look at, if you’re paying.

ClintonWilkin’sn,
It’s always cheaper to put down 20% and pay a higher interest rate.

Todd Veinotte
But that said, it’s not a complete loss because of the things you mentioned.

Clinton Wilkins
You can get a lower interest rate and there are some additional protections. There’s a couple of other fun things that the insurers do. They all have a green home program. So, if you buy a home and it has an energy rating above a certain number, or if you go and get an energy efficiency test and it comes back. Depending on what score it gets, you can get a percentage, typically, up to 25% of your CMHC premium back, and that goes right to you, the borrower, not to the bank.

Todd Veinotte
What about solar panels and those types of energy upgrades? Yeah, I think that’s a good thing if you’re refinancing or whatever.

Clinton Wilkins
I think making your house more efficient is always a great idea. There are rebates and all types of things that you can get. And the province has different things on the go. So I think that’s certainly something to look into. I don’t know if solar panels hit to be honest. Like, I see some people, there’s some houses that we see that have solar panels, but not on a mass. The one thing that I see that people are adding is heat pumps. I see a lot of people taking out their oil furnaces and putting in an electric furnace with a heat pump. So that’s with central air. I’m seeing a big popularity with even mini splits. For people who have an electric-based border, they have a different heating system than maybe central air, that doesn’t work. So we’re seeing a lot of mini splits as well.

Todd Veinotte
The financing of those can be done through when you renew the mortgage?

Clinton Wilkins
Yeah, why not? You can always refinance up to 80% of the market value of your house. So let’s say again, the house is worth $500,000, we can do a new mortgage and or HELOC combo up to 400,000, so that would be 80% of the market value. So, if the house is 500 we can go up to 400.

Todd Veinotte
Wow. And how many people generally do that? You’ve seen a lot of the uptick in that.

Clinton Wilkins
I would say in refinance transactions, the bulk of our clients will go up to 80%, the bulk, I’m not saying all different people have different needs, and sometimes they can’t qualify for the full 80%. It depends on their income. It depends, maybe the location of the property. I have a client that I was working with down towards the valley, the credit wasn’t so hot and the location was more rural. The bank said, we’ll do this transaction, but we’re only gonna do it to 65%, which, again, pros and cons. Would you rather an approval or no approval at all?

Todd Veinotte
Yeah, that’s right. And rural areas as well have downsides because you’re not on city municipal water.

Clinton Wilkins
Then sometimes they can be especially useful for more risky borrowers. When we talk about things like alternative lending, some of the alternative lenders don’t want to go to some of these more rural areas because of concerns on foreclosure. So, if they have to foreclose, can they sell the property or are they going to have to take a big loss? And how long is that going to take?

Todd Veinotte
All circles back to why a mortgage professional, a mortgage broker like yourself and having reviews are important.

Clinton Wilkins
It’s so, so important, and we do an annual review with our client, yeah, and that’s the one thing that I think sets us apart from retail banking, as compared to retail banking, people are changing over all the time. The turnover is wild for me, I’ve been doing this for 20 years, and I have a lot of clients, but we reach out to them every single year to touch base and say, Do you want to renew? Do you want to review your finances? Are you in the best financial position? Do we have you in the best product? Things change with people. Think about even yourself. Divorce, marriage, health issues, moving, changing provinces, changing jobs, becoming self-employed. Now being employed. A lot of changes and that’s why it’s so important for people to review their finances.

Todd Veinotte
Be right back more. Mortgage 101: your guide to homeownership.