New debt calculations to affect investors

THINK OUTSIDE THE BOX:  Another round of lending guideline changes make it even more prudent for you to contact your mortgage professional!

Arrgh! Yet another rule change. New lending guidelines – and even rumours about new lending guidelines — can really affect investors and regular consumers, alike. Let me explain.

Within the last few weeks, we began to hear rumbling that lenders were going to change the way they calculate payments on credit cards and unsecured lines of credit, but, more dramatically, on home equity line of credits.  

Basically for any access to credit you have available, lenders are changing how they calculate your debt serving levels, whether you use that line of credit or not.

The largest change has occurred with respect to HELOCs, or Home Equity line of credits.

Lenders have traditionally used the payments you were required to make on those HELOCs to determine the maximum funds you now have to available to put towards a mortgage payment.  If you had no balance, then there was no payment (seems logical) and so just having the unused credit did not affect their debt calculations.

If you had a balance owing, then the lender’s calculations were then based on the minimum payment on the HELOC based on your statement (usually only the interest that had accrued for the month).

Here’s the rub, so to speak.  New policies being introduced require payments to be included that are not always based on what you owe or what your actual payment would be.  They are being based on how much you can access.  Confusing? Well we now have five different ways lenders calculate payments.

Consider the following example:

You have a line of credit secured on your house with a limit of $250,000, but you do not owe anything.

Before the changes, you had no payment.  That means this line of credit did not affect your borrowing.  Under any the new rules, the payment that will be included in the calculations can range from $590.00 to $387.00 to zero a month depending on the lender.

Consider that same line of credit with a $50,000.00 balance at 3.5% interest:

Before the changes your payment would be the interest only…roughly $146.00 monthly.

 Old method for a $250,000 line of credit with a $50,000 balance

                                                     Lender A       Lender B       Lender C

Payment Calculation          $145.83       $145.83       $145.83

Actual Payment                    $145.83       $145.83       $145.83                                 

New method $250,000 line of credit with a $50,000 balance

                                                     Lender A               Lender B               Lender C

 Payment Calculation          $1,500                  $906.25                $625.00

Actual Payment                     $145.83                $145.83                $145.83

Maximum Mortgage*           $334,357.82     $459,821.24       $510,466.83

*assuming nothing changes but these payments

Under this new draconian regime, each lender is defining its own guideline.

So what does all this mean?

Well, change is the only constant.  I see all these rule changes as validation of the important role of mortgage brokers. Our value proposition is so much more than rate because if an investor with a HELOC is now being turned down by several lenders, it often requires a mortgage professional to determine which lender will accept it.

Written by Chad Robinson

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