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Many Canadians use debt to purchase their homes, start a business or to receive a post-secondary education. The total household debt statistic takes an accumulative approach to see what households owe in relation to disposable income. Trouble can be brewing on a national level when debt greatly outweighs income.

A recent report by the Organization for Economic Co-operation and Development (OECD) claims that Canada’s household debt levels are higher than other countries. This report acts as a warning sign to our national economy. 

OECD’s Report

This economic report frames the current economic situation through the lens of the 2007 credit crisis. A reason for that crisis was the increase in household debt across the board. Since that time, most nations have lowered their debt load, yet for some reason, Canada has not followed this trend. In fact, it’s done the opposite.

At 101%, Canada’s household debt to gross domestic product ratio ranks last. To compare, the U.S’ ratio is 80%. Italy is barely scratching 40%.

Why are Canadians Relying on Debt?

The easy culprit to pin Canada’s debt crisis on is real estate. As housing prices increase in value, Canadians must borrow more to be homeowners. Borrowing doesn’t end with mortgages, though. From heat to furniture to maintenance, Canadians use debt to keep their homes running.

In places like Vancouver and Toronto, thriving housing markets impacts the rental market, forcing many renters to live off debt. As Canada’s population grows, the debt load per household for both homeowners and renters will rise.

Possible Solutions

Household debt is a problem that has surfaced for most western countries. The simple solution (if there is one) is for Canadians to spend more within their means, curbing their reliance on debt. It could be as straightforward as families getting by on one car instead of two, but in fairness, this is always easier said than done.

Measures to protect borrowers and lenders from skyrocketing prices is the most immediate way to reduce debt load. The Government has taken steps through implementing a stress test and a recent interest rate hike by the Bank of Canada could provide some relief.

The data provided by this report should be taken very seriously by Canadians and policy makers. It’s a situation that needs to be monitored and handled before the ratio becomes even more out of whack.

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Predicting any housing market is difficult. Predicting Toronto’s housing market requires almost Nostradamus-like abilities.  The Toronto market has held strong for several years now, but the recent dip has led many prognosticators to wage a bet that another spike is looming.

Where will Toronto’s housing market end up a decade from now?

Long-term Growth

There are signs that Toronto will come out of the recent market lull and enter a period of growth that will send housing prices soaring. It might take another year for this to happen, but the market is expected to increase in value. This could create some negative scenarios for those dreaming of homeownership.

Once the demand races beyond the supply and people adjust to new policies and regulations, the market will turn.

Housing Will be Less Affordable

For years, there’s been discussion about Toronto’s housing being unaffordable, especially for young professionals and the middle class.  With the housing market bound to rise in value, there’s a chance that affordable housing will become more challenging.

The condo market should continue to hold strong for the next few years but the housing market should outpace it at some point.

Remember, once the market starts to heat up, there will be a rush to buy including speculators looking to make a buck on an investment. This could speed up the market and inflate it to unsustainable levels.

A Good Time to Enter the Market

Now is a good time to enter the market as prices are relatively low. There are some obstacles—high interest rate, stress test, lack of supply—but if a person can get approved, there’s a window where aggressive bidding could pay off in the future.

A Decade Later

It might seem futile to try to predict the future of a volatile housing market but it’s a worthy exercise. The current state of Toronto’s housing market is temporary and the future will affect tens of thousands of households throughout the GTA.

Researching what will happen in a year or two or ten can help someone make more informed decisions as to when to buy, when to wait and when to invest.

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A lot of Canadians are house rich and cash poor; meaning, they’re good at paying down their mortgage, but at the end of the day, don’t have a lot of disposable income. That can make it difficult for the average Canadian to come up with the much-needed funds for an unexpected expense, purchase, renovation, debt consolidation, etc.

Two of the most popular ways for homeowners with more than 20% equity in their homes to free up some cash is with either a home equity loan or home equity line of credit (HELOC). They sound alike, but they’re very different; understanding these differences will help you decide which one is right for you.

What Is a Home Equity Loan?

A home equity loan, often referred to as a second mortgage, is secured against your property. It acts like your primary mortgage and is second in line to get paid off should there be a default.

After you are approved for a home equity loan, the lender will send you a one-time lump sum payment that is paid off over a set period of time with a fixed interest rate, and predetermined monthly payments. Just like the primary mortgage, you are charged interest on the total amount of the home equity loan as soon as you receive it.

Credit Limit with a Home Equity Loan

With a home equity loan, you can borrow up to 80% of your home’s appraised value, minus the unpaid balance on the primary mortgage.1 The interest rate can either be fixed or variable. While the interest on a home equity loan is generally higher than on the existing mortgage, it is a lot lower than other types of loans.

Uses for a Home Equity Loan

Anything! It’s your money, you can use it for anything you like, including renovations, debt consolidation, paying for tuition, a wedding, investing. The sky’s the limit!

What Is a Home Equity Line of Credit (HELOC)?

Like a home equity loan, a HELOC is secured against your house and allows you to access the equity you’ve built up in your property from paying down the mortgage and as the price of the home has increased.

A HELOC is a revolving line of credit with an adjustable interest rate that goes up and down with the markets. As a line of credit, the money is deposited into an account that you can access as little or as much as you want, whenever you need it. Unlike a second mortgage, there are no fixed repayment amounts; the lender usually only requires you pay the monthly interest on the money you use.

Credit Limit with a HELOC

The credit limit on a HELOC combined with a mortgage is 65% of the home’s purchase price or market value. You can increase the credit limit on a HELOC to 80%, but only if it is combined with a regular mortgage.

Using a HELOC to Pay Down a Mortgage

You can use your HELOC for anything you like. You can even use a HELOC to pay down a mortgage. The interest rate on a HELOC is blended or the same as your usual mortgage. Because it can be blended, a lender can change the HELOC rate at any time.

Does that mean you shouldn’t use a HELOC to pay down your mortgage? Not necessarily. The interest on a HELOC might be a little higher than the interest on your mortgage, but you’re only charged interest on the amount you actually borrow from the HELOC, not the entire amount—like you are with a mortgage.

The same payment using a HELOC compared with a mortgage actually pays down more principal; the mortgage then gets paid down a little faster and with less interest.

A Home Equity Loan or HELOC: Which One Is Right for You?

That’s something only you and your lender can decide on. But there are times when one might make more sense over the other.

For example, a home equity loan might be a good choice for homeowners who need upfront money for a one-time event (renovations, wedding, etc.) and like the idea of a fixed-rate loan.

If, however, you want to have access to the money over a longer period of time, a HELOC might be a good idea. Especially if you can pay the amount you borrowed back right away; this would mitigate any costs associated with a variable interest rate.

Or, if you’re a homeowner with bad credit or only have less than 20% equity built up in your home, you might want to look at getting a home equity loan from a private lender. Private lenders do not have to follow the same strict guidelines that Canada’s big banks do. Instead of hurdles, private lenders provide you with more options, freedom, and flexibility.

Canadalend.com, Helping Ontarians Access Their Home Equity

The vast majority of Canadians have not saved up money for a rainy day. That’s why more and more homeowners are accessing the equity they’ve built up in their homes; either with a home equity loan or HELOC. And no one is better at helping property owners tap the equity they’ve built up in their homes than Canadalend.com.

Unlike the big banks, which only try and sell you their own financial products, the licensed mortgage professionals at Canadalend.com are independent. We have access to hundreds of different lenders. That means Canadalend.com can find you a lender that will provide a home equity loan or HELOC that the big banks can’t.

Apply online in 60 seconds & get approved now!
Call us for more information 905.881.0242

If you’re a homeowner and are looking to take out a home equity loan or HELOC, contact Canadalend.com today. We’ll evaluate your current financial situation and help you find a lender that can provide you with a financial product that suits your needs. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Sources:

“Borrowing against home equity,” Government of Canada, January 31, 2018; https://www.canada.ca/en/financial-consumer-agency/services/mortgages/borrow-home-equity.html.

Flipping houses is a popular real estate investment, where the investor buys the home with the goal of quickly reselling it for profit. Often, they make improvements to the property to maximize its value.

Flipping houses in the GTA real estate market can be a smart investment and a positive experience if the investor knows what they’re doing. The biggest aspect that many don’t consider are the tax implications that come with flipping a property.

How to Flip a House

There are different ways that one can go about this. Some prefer to hold onto the mortgage for the shortest amount of time possible by flipping them as soon as the market heats up. They might not maximize value but they should yield a profit.

Other investors play the longer game where they invest in the property through renovations and improvements. This can result in a greater return on investment but it means the investor will be responsible for the mortgage for longer, and must finance the renovations. A greater financial commitment can lead to a much greater reward.

What’s the Risk?

There is risk with any investment. Each property comes with some problems, which could affect how quickly the house can be sold. In addition, markets fluctuate fast and if it happens to cool before an investor can resell the property they could have to financially carry it for longer. This could reduce the profit margin.

Any unexpected delays in renovations or construction could also result in less profit.

Restrictions and Tax Implications

When the GTA market heats up, one suggestion to cool the rising prices is to tax house flippers. This would impede speculative purchases and allow more residents to buy a home. Restrictions and tax implications could hinder some investment opportunities, but in conjunction with the new mortgage rules could protect borrowers, lenders and investors.

Another idea being considered is a graduated tax system. This means that an owner who buys and sells a home shortly after purchase would pay a higher tax rate.

These ideas do come with the contrarian viewpoint that it would take value and money out of the market, driving down the price of homes.

Flipping a home isn’t for everyone, but savvy investors who understand a specific market could yield a huge return.