There are now a number of lenders marketing these products, and as time goes by I have no doubt that they will become increasingly popular. A HOLC is a substitute for, or an add on to, a mortgage when the outstanding mortgage(s) registered against the property represents less than 75% of the home’s value.
A HOLC is a line of credit that is completely secured by the equity in your home. While there are products that are similar to this that are registered up to 85% of the home’s value, anything over 75% loan to value tends to carry very high interest rates and as a result not recommended.
The real benefits of this product come from the flexibility and rate. Like a line of credit, it gives holders the ability to pay down and draw from at any time without penalty. Since it is fully secured, the rate for this product is generally set at prime. It a good product for homeowners who have equity in their home along with the need to draw on other credit instruments. It is also one of the only personal loan mechanisms that I know of that enables the holder to borrow at such a low rate. At the same time, I do not generally recommend that people take a HOLC in place of a mortgage.
While a HOLC is at a great rate when compared to most personal lines of credit, it is not as competitively priced as the better adjustable rate mortgages on the market. If you are willing to bear the interest rate risk of a variable rate product then you should consider having the larger portion of your mortgage at the prime less discount that an adjustable rate mortgage offers, while having the balance as a HOLC.
Another problem of having a HOLC as a mortgage is the convertibility feature. While an adjustable rate mortgage can be converted to a closed term at any time very easily, the conversion of a HOLC requires a lot more work and usually additional legal costs. Remember that it is important to always consider the total costs involved in borrowing when trying to make the right lending decision. The true cost of borrowing has to reflect all costs associated with arranging a loan from start to finish.
While I believe that the HOLC is a great product for people who are using lines of credit, or personal loans at higher rates, I don’t feel it is a product that is well suited to replace a mortgage for most people. Those who have a hard time managing debt and/or can’t afford short-term fluctuations in interest rates should definitely not consider these types of products. No matter what your lending needs, be sure to carefully think whether you a falling for a sales pitch, or being carefully aligned with the right product.
Until next time – best of luck finding your mortgage and home.
Calum Ross is one of Canada’s top ranked mortgage advisors. He has appeared on Canada AM, Investment Television, Report on Business Television, City TV, is an industry speaker and mortgage columnist. He holds both a B.Comm and MBA in Finance.