# HELOCs are callable -- but does it happen?



## Racer (Feb 3, 2010)

Hello folks,

Just wondering...

I know that HELOCs are callable loans, meaning that if the borrower ends up in default (usually triggered by missing interest payments by 30 or 60 days) the banks can choose to call the borrower and demand that the loan be paid in full.

I'm curious though -- how often does this happen in Canada? I find that so many of the information sources out there are USA-dominated. 

Surely there is a period of re-negotiation for a higher percentage or what have you. But I'd love to hear from anyone with inside (or any, really!) knowledge of the actual play-by-play. 

Thanks in advance for any replies.


----------



## andrewf (Mar 1, 2010)

Actually, a callable loan is an agreement where the lender can demand repayment at any time, regardless of whether the borrowing is living up to the terms of the contract. This could be due to a change is perceived risk, such as the borrower losing their job, or the lender wanting to maintain higher capital ratios by reducing its loan book.


----------



## Racer (Feb 3, 2010)

Andrewf, I have now read that most HELOCs start out callable, without any requirement that default be entered into before being called. Thanks for the correction.


----------



## CanadianCapitalist (Mar 31, 2009)

I used to have a secured line of credit with Royal Bank. The agreement clearly stated in bold letters that RBC can ask for any outstanding loan to paid back at any time for any reason. 

During the credit crunch the banks bumped up interest rates on new and existing SLOCs but AFAIK did not call back a loan. But when bankers again do something very stupid in the future and the banks are in trouble, who knows what they will do? It is a risk and those who borrow from SLOCs to invest should be aware of it.


----------



## james4beach (Nov 15, 2012)

Some Americans did have their HELOCs effectively frozen and were unable to borrow more
http://www.boston.com/realestate/news/blogs/renow/2008/01/heloc_suspensio.html

Notice that article is from January 2008, well before the stock market even crashed and things got worse. The HELOC and home borrowing situation got even worse through 2008-2009.

This is why I don't think you should rely on HELOC for your emergency cashflow. Economy slows, home prices fall, you lose your job, you can't borrow more.


----------



## sags (May 15, 2010)

I remember back during the US recession, when home prices were plummeting in value, there were websites devoted to nothing but lenders cutting off credit. Some of the big US banks sent out letters to customers, cutting credit limits according by zip code........for areas where home price declines were the biggest.

I don't recall they were demanding full payment of balances, but were lowering the credit limit with each payment made by the borrower, which meant people couldn't borrow again.......basically shutting them off from further credit.

If people owed no balance, the banks were closing the accounts.

A credit crisis is what caused caused the recession to become as deep as it was.

Had banks allowed home owners to re-finance at low interest rates, rather than demanding the "full" rates when the teaser rates expired........there might never have been a recession, and the banks wouldn't have been stuck with millions of foreclosed homes.

But of course, with all the packaging and selling.......and reselling......of mortgages in "tranches" within mortgage derivatives........and with little or no paperwork.........nobody knew who actually held the mortgages.


----------



## Just a Guy (Mar 27, 2012)

You realize nearly any loan is callable...including some mortgages. Also, they don't have to renew your mortgage when it's due, and most people only "lock" in for 5 years at most.

Just because it can happen, doesn't mean it will happen. If a bank started to do something like call in loans from people with a good credit rating, there would be many problems happening in the world that would be much worse.


----------



## the-royal-mail (Dec 11, 2009)

It can happen in a divorce.

I agree with james. Do not rely on credit as your emergency plan. Looking after your own affairs, during good times and bad, is the indication of true financial independence.


----------



## hystat (Jun 18, 2010)

if payments are being made, and likely to continue to be made, the bank isn't going to call a loan in. That's the business they're in.


----------



## sags (May 15, 2010)

I believe CMHC rules would apply........if the combined HELOC and mortgage debt exceeded 80% of the appraised value of the property.

The lender would likely scale back the HELOC limit and the home owner would have to pay for CMHC insurance.

Not a good situation for those with little or no equity in their homes.


----------



## sags (May 15, 2010)

The US had a terrible collapse of values in the housing market.

They have 30 year fixed rate mortgages.

A similar situation in Canada could be far worse.........as we have shorter term mortgages with renewal dates.

Let's hope it doesn't happen..........although a lot of people are saying it is inevitable.


----------



## james4beach (Nov 15, 2012)

Calling in a loan is one thing, but I think preventing new borrowing is a different thing (?). I don't know the terminology for this, but say you have a current HELOC balance, but the bank won't extend you more credit if you want to borrow more.

Very possible if home prices drop significantly and the banks determine higher default risk. Given that Canadian home prices are so high versus median income, and default/bankruptcy rates are so low right now, the danger of a "crunch" seems like a real one.

i.e. default rates can only go higher from here, that's guranteed


----------



## MRT (Apr 8, 2013)

sags said:


> The US had a terrible collapse of values in the housing market.
> 
> They have 30 year fixed rate mortgages.
> 
> ...


I don't follow that logic. Why do you think shorter term mortgages have any relevance? 

The issue in the U.S. was that people had adjustable rate mortgages that went up after a 'teaser' period of a lower rate (a product that was far less common here at the time) and the U.S. had extremely shoddy qualification criteria in comparison to Canada, in that people shouldn't have even qualified for the low 'teaser' rate, never mind considering what was going to happen when rates adjusted.

Canada is nothing like the U.S. market in terms of mortgages, historically speaking.


----------



## sags (May 15, 2010)

MRT said:


> I don't follow that logic. Why do you think shorter term mortgages have any relevance?
> 
> The issue in the U.S. was that people had adjustable rate mortgages that went up after a 'teaser' period of a lower rate (a product that was far less common here at the time) and the U.S. had extremely shoddy qualification criteria in comparison to Canada, in that people shouldn't have even qualified for the low 'teaser' rate, never mind considering what was going to happen when rates adjusted.
> 
> Canada is nothing like the U.S. market in terms of mortgages, historically speaking.


The collapse started in the subprime market but spread to many other home owners. In some geographical areas, home prices dropped by 70%........and that affected people who had considerable equity in their homes.

In a 30 year fixed rate, the owner of a home worth less than the mortgage debt can't be required to pay the difference.

In Canada.......the bank can assess the property value at the renewal date and require the owner to pay any difference between the home value and outstanding debt.

Another problem for home owners could be HELOCs.

OFSI rules are that a combination of HELOC and mortgage cannot exceed 80% of the value of the property.

If home prices fall and the debt ratio is over 80%......owners may have to secure CMHC insurance and pay the fee.

I think the likely scenario would be that HELOC limits would be lowered to accommodate the 80% ratio.

_More Onerous Calculation for Other Debts: 

When determining how much mortgage a borrower can afford, lenders look not just at the monthly mortgage payments but other property costs and debts (taxes, heating, credit cards, car payments etc.). *Under B-20, many lenders now look not just at what you owe but how much you could owe. For example, a borrower may have a secured line of credit with a $0 balance but a $50,000 limit. Despite the fact that there is nothing owing lenders may now impute a monthly payment amount and include this in the debt service calculations. * Similarly, on other revolving credit facilities such as credit cards, lenders are now less willing accept the actual minimum monthly payment but will instead impute a higher monthly amount, typically 3% of the balance. Each of these practices can have a significant impact on the amount of mortgage a borrower will qualify for.

Maximum LTV for HELOCs Lowered to 65%: 

Home Equity Lines of Credit are now limited to a maximum of 65% of the value of a property, although the total loan to value of a HELOC combined with another standard mortgage can go as high as 80%. For example a borrower with a home worth $500,000 can have a $200,000 first mortgage and a $200,000 HELOC, but cannot have a $400,000 HELOC alone._

http://www.centum.ca/john_smith/Blo...Know_About_OSFI_s_Tougher_Mortgage_Guidelines


----------



## Mortgage u/w (Feb 6, 2014)

Ok so here's the insider information you've asked for.
The 'callable' mention refers to the available balance you have. So example, $100k HELOC limit: $60k mortgage, $40k available equity. Well that $40k equity is callable. Should the lender not want to 'expose' themselves further, they will call back that available equity limiting your borrowing potential. They cannot call back the $60k mortgage if your payments have not defaulted. Once you default on the mortgage, then call it what you want but the lender will pressure you to pay up.

There are too many scenarios that may follow in case of mortgage default. But ultimately, a lender can foreclose on your property to get their money back.


----------



## marina628 (Dec 14, 2010)

Mortgage u/w said:


> Ok so here's the insider information you've asked for.
> The 'callable' mention refers to the available balance you have. So example, $100k HELOC limit: $60k mortgage, $40k available equity. Well that $40k equity is callable. Should the lender not want to 'expose' themselves further, they will call back that available equity limiting your borrowing potential. They cannot call back the $60k mortgage if your payments have not defaulted. Once you default on the mortgage, then call it what you want but the lender will pressure you to pay up.
> 
> There are too many scenarios that may follow in case of mortgage default. But ultimately, a lender can foreclose on your property to get their money back.


My niece is going through this right now as a result of the marriage breaking up .They cut back the unused portion of the credit line and as she makes payments they keep reducing it so the consequence to her was the credit line is showing maxed all the time.She did get another unsecured line in her name only at a higher interest of course from same bank lol


----------



## Mortgage u/w (Feb 6, 2014)

marina628 said:


> My niece is going through this right now as a result of the marriage breaking up .They cut back the unused portion of the credit line and as she makes payments they keep reducing it so the consequence to her was the credit line is showing maxed all the time.She did get another unsecured line in her name only at a higher interest of course from same bank lol


Marina, I would advise your niece to lock in her mortgage balance to a term loan, that way the HELOC balance will not affect her credit. Alternatively, if she doesn't need the available credit, she should get rid of the HELOC all together and stick with a traditional loan. Interest rate for a variable mortgage today is prime -0.60% so 2.40% vs her line of credit surely at prime +1 or 2% (4-5%). Also, a traditional mortgage is not a collateral charge which allows her to switch lenders or make changes more easy.....this is most critical in such situations (separations, deaths, loss of income, etc.)


----------



## marina628 (Dec 14, 2010)

She is currently making the minimum payments until she gets her day in court with the husband.He has not paid anything towards mortgage in a year and she has a bank calling about his credit card bill.He used their credit line to buy a boat and a truck and he has these things and she is just trying to be responsible and pay what she has to pay right now while raising 3 kids on her own.She has to go to court to get his name off debt and stuff so until this is resolved she cannot change terms , renew etc.


----------

