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181. Is Your HELOC A Ticking Time Bomb? · Wealth On Main Street

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  Speaker A: You are listening to the wealth without Bay street podcast, a canadian guide to building dependable wealth. Join your hosts, Richard Canfield and Jason Lowe, as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on.
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• 0:35
  Speaker A: That's Sevensteps ca. Is your home equity line of credit a ticking time bomb? Well, I hope not, but I'm joined together with my friend Henry Wong here today, and we're going to talk a little bit about some of the, let's say, market and lending uncertainty that's taking place, at least in the canadian marketplace, certainly happening, I believe, all across the board. We are in turbulent economic waters and that causes, of course, bumps on the road. And there's certain changes that are happening really all the time. And these changes have a way of affecting people both. We have a lot of real estate investor listeners, we have a lot of people just own real estate, of course, that are clients and that listen to our program. So we're going to talk about some fun things and Henry is going to share a personal story and we're going to also reflect on the last major financial crisis in memory going back to 2008 and how certain items kind of tended to happen at that time as well. And we're starting to see maybe a little bit of, I guess, history repeating itself to some degree. So a lot we're going to chew on here today. Henry, excited to have this conversation. Where would we like to begin?
• 1:43
  Speaker C: Yeah, thanks for having me, Richard. I think the main thing that I was taken quite a step back in terms of a notice I received just a couple of months ago. Sorry. And this is currently June that we're recording this. And when I received this announcement, I was very shocked. So I personally have done real estate for a very long time from the professional standpoint and personally as an investor. And when I say long time, over twelve plus years. And I never particularly enjoyed that particular, I'll call it asset class, if you were to say, because it relied a lot on a funding source from a traditional all bank. Now, this particular announcement that I received because I have a primary residence and I do have a mortgage, and the structure of that mortgage that I have is what's called an amortized loan. A mortgage is an amortized loan. When most people talk about interest rates, they think about just an interest rate, but very few people actually look at the interest volume when it comes to an amortized loan and part of an amortized loan. When you make a payment, the structure of that payment includes principal and interest, where a big portion of that interest, that payment is actually pertaining to interest. And that's what we refer to as volume. Now, as part of the process that I go through to get my mortgage is I will use my banking system to dump in extra payments into my mortgage. And this particular type of product that I have related to my mortgage is where if I make a payment to my mortgage immediately, there includes a component related to a home equity line of credit that is re advanceable to me that I can draw on. So a lot of people in the most recent environment have these type of structured mortgage products. And so the bank that I have this product with sent me this announcement. And when I read it, I was actually very shocked on this particular type of announcement. And the reason why I was shocked was I didn't realize that this could actually change. They can actually change the terms of my contract on my mortgage product that I have, or the structure of the mortgage and the Heloc. I was very shocked about it and the change related to it. Was that how they determine what was now re advanceable as a HELOC?
• 4:27
  Speaker A: For me, yeah, this is fascinating stuff. And I think that for anyone who has a similar product, again, these are very popular specifically for homeowners. You don't see these types of products as frequently applied to rental properties. You can get helocs on them as well. Sometimes the lending criteria is a little different, but a re advanceable one in this nature. I think that, not that they're impossible, but it's less common that we see them on a rental type property, whereas the homeowner property, the bank is more willing to generally put this type of a product in place. And most lenders offer some variation of they give it their own label or name. So it's not about who the bank or the lender is here. It's about the circumstance that's taking place and the level of control that the consumer has, what they think they have versus what they actually have. Am I catching that correctly, Henry?
• 5:20
  Speaker C: Yeah. I mean, again, I got completely caught off guard because I thought when I signed the contract for my mortgage, that's the structure of my product. That can't change. Like I'm grandfathered into my term of five years on this product, but apparently that could change. And I was shocked.
• 5:40
  Speaker A: Yeah. So do you want to show, should we show the letter? Do you have a version of that that we can take a look at? Or do you want to just paraphrase some of the key bullets that come out of there?
• 5:48
  Speaker C: Yeah, I'm going to paraphrase it, but I will show a particular diagram that they use to walk through it. Now, one of the things when I did was once I received that announcement, for those of you who are listening to this is purely educational, for the purpose of really understanding that when using me as an example, when I'm borrowing money from someone else, apparently those terms, they're the one in control. When we talk about becoming your own banker, building your family banking system, the infinite banking concept, we're always trying to talk about reclaiming and having control of your pool of, you know, especially me living in Toronto, real estate prices went the way that it went to. I did need to utilize credit, which is using from the bank. So I'm under their rules. And this is a very stark awakening for me to realize that the rules can change, despite having a contract with them. And what's important to see is that the announcement comes from the office of superintendent of Financial Institutions, or short for Ossie. And in that particular governing organization. The regulation that they had on these mortgage products, is that in this particular mortgage product that I have, and this is a generalized across other financial institutions that have these products, is anything of 65% of the value of that property should be amortizing, and not available for reborrowing. So it's not available for re advancement. Most people realize that when you get a mortgage, you can get 80% of a mortgage on the value. So if you have a million dollar property, you can get access to 80% of that as a mortgage. And obviously, there's other lending criteria that you have to meet, like your ability for your income to sustain the payments related to that mortgage. And there's other liquidity tests that they go through, but the balance that they can lend you is 80% of the property balance. But of that 80%, anything that's above 65% cannot be. So you can't have an 80% re advanceable loan, like a home equity line of credit. You can only max. So the cap is 65%. So, going back to the numbers that I'm using, 1,800,000 is the mortgage. And once I make principal payments below 650, so let's say 550, I can re advance myself an extra 100,000. So that is that re advanceable portion. And this is the part that we're going to talk about. So for me, on that experience that I'm going through, I'm just going to share my screen and under the current rules that they were lending of that once I've reached the territory that I'm eligible to have a re advanceable loan or line of credit. So once I'm below that 650 line, when I make that 1000 payment, so I'm 649,000, I could re advance myself $1,000 of the principal in the form of a HELOC, which has its subject to whatever the interest rate is currently prime rate plus their premium that they put on top of it. What has recently changed was without any knowledge, right now, this new rule is going to be implemented in October of 2023 and onwards. So any new mortgages, if you were to renew or even at the current moment when I now make a payment of $1,000 and I'm 649,000 down on my mortgage portion, meaning I should in the past have 1000 accessible as a line of credit, they have changed the rules, which is not clear yet. What was supposed to be 1000 now is somewhere in the range of a re advanceable home equity line of credit of somewhere between $700 to $900. So that means it's not dollar for dollar anymore of what's re advanceable. To me, it's something in the form of they've contracted how much I can borrow in the form of a home equity line of credit. And this is very particularly concerning for me or probably a lot of other Canadians, because most recently, just using the 2020 pandemic or lockdown that has happened, a lot of people who didn't have work, what they've actually ended up going into is drawing money from that home equity line of credit that they had, where they had the available credit room to do that. And presuming if you put down 1000 or whatever amount that you put down, you can immediately re advance that too. Now you can only re advance 70% to 90% of what you've paid down. And that actually is, in my opinion, generally a very big problem for what's to come.
• 10:54
  Speaker A: An important note on here is that it's talking about. So in other words, old world, whatever amount was applied to the principal balance of the traditional amortized debt was re advanceable, dollar for dollar. So that would be with your regular scheduled mortgage payments, monthly, bi weekly. However you're doing that, every time that you make that regular payment, there would be a principal portion that would be re advanceable, accessible for some other purpose. Emergency fund, home renovation, a lot of people use implement something called the Smith maneuver. We have other content that we can link to here that speaks about that, and some podcast interviews we've done around that topic. There's many reasons why people would want to have that access, and there's also just like a bit of a peace of mind feeling that should you absolutely need to dip into it because of a circumstance that comes up. Take the global lockdown as an example, where you now have the ability to work with an extra lifeline that wasn't there previously. Now, if you are making extra principal payments, larger sums, which Henry, you identified at the beginning, you use your private family banking system, you access capital from there, and then you can make lump sum deposits towards the principal balance within the rules available to you of your particular loan, given all their little terms and things that they put in there, that you can strategically make extra payments to buy down that debt, but create that re advanceable dollar for dollar amount for some other purpose. And now that dollar for dollar is gone, it's going to be $0.70, maybe to potentially as high as $0.90 on the dollar. But we don't yet know because the bank doesn't even know given the letter that they've sent you. So I do think that this is something that obviously is concerning. And we're not here to raise fear. We're just here to educate about these are real things that are happening and affecting people today, not just in Canada, but certainly in the states as well. And we're going to talk a little bit about some of the history of that in a moment. Go ahead, Henry.
• 12:54
  Speaker C: Yeah, and what I wanted to highlight, at least particular to my specific situation is, and what I coach clients on is using their private family banking system to recapture debt. And Richard, when we work with our clients, recapture a lot of their debt that is owed to an external third party creditor and to bring it into their system so that they have more favorable control of the debt that they have in there. And one of my primary objectives when I've made my lump sum dump ins, now, as part of my objective, when I access money from my system to pay down my mortgage, was I wanted to make sure that I had that re advanceable line of credit if and when I wanted to use it. So this was a big key. I recently purchased a home a couple of years ago, and there was that portion where it was not re advanceable because it was above that 65% line. So my objective was to get below the 65% line, not only from the standpoint that I can have a re advanceable HELOC in case I wanted or needed to use it. Because my part of my journey is to continue building my banking system so I have the capacity to access it from that system. But as my system is still in its infancy stages needing to build, I still need to rely on external creditors. So my first objective was to make sure I had the capacity available to do things, especially to take advantage of opportunities, or in case other certain cash flow situations were to rise, I had that re advanceable portion. The second part was, once I've kind of recaptured and had a lot of the debt into my system, I again have that flexibility of choice of using the HELOC to do things if I wanted to again use it for opportunities or to bail myself out of situations.
• 14:50
  Speaker A: Right, again. So opportunities being, hey, maybe you wanted to grow the business in some way, or maybe you wanted to purchase a secondary business, or maybe you want to do some other investing, then there might be some logical reasons why you might use that home equity credit line to do that versus your system, because your system recaptured the original debt, you're now making the payments that used to go to your regular brick and mortar bank, to the system that you own and control, and you're redirecting that flow of money which you had already committed to. You're containing that in your own wheelhouse, but you're also creating an opportunity for when things come up and. Right, that's what the route is all about. We want to give and help people understand that you're always at your best potential when you have access to capital liquidity to do the things that you need to do and want to do when they show up, and I don't mean going and buying a boat. What I mean is an opportunity of high caliber that you know something about strikes, and you have the ability to move at a measure of speed to capitalize on that particular opportunity.
• 15:54
  Speaker C: Yeah. The second thing that I also wanted to cover was why I would make such a big pay in to my mortgage. Again, funded by my system, was because any early mortgage that you take, the terms of the structure of it, again, very few people actually get this. I remember in the past when my parents had a mortgage, the banks would provide a very detailed amortization schedule. They don't actually often provide that anymore. And so part of the coaching that when I work with clients, we walk through their amortization schedule, we back end and derive an amortization schedule, and they can actually see the effectiveness of their payments. So going back to my comment on when you make a payment on an amortized loan, especially on the term, usually, let's say it's a three, four, or five year term. So I'm going to use five years as the example, the first few years of your payment on a five year term mortgage, a majority of that payment upwards to 80 or 90%, is actually to interest. So by me making a dump in principal payment, now, my payments that I am still required to pay on a monthly basis, the effectiveness of the distribution of principal and interest has at least, instead of being 80%, is now at least going to some progress of 60% to 50%. And again, so that's all part of the structure of the amortized loan, because I've accelerated the pace of what I'm paying. I'm still paying a huge volume of dollars in interest, despite my interest rate not being that high. It's still trying to be productive with the effectiveness of my dollars.
• 17:31
  Speaker A: Yeah. And to give, like, not a counterpoint, but to expand on the thinking of that a little bit now. So this conversation kind of dovetails into the rising interest rate environment, which I suspect the rising interest rate environment is part of, not exclusively, but a part of the reason why you received this letter in the first place. We'll circle back to that in a moment. But because there's some measure of uncertainty about the rising interest rate environment, and some people are on variables and their payments have been adjusting and tweaking to some degree versus people who are on a fixed rate. Well, if you are on a fixed rate scenario and you still have that three or four or five year term, it is very important as a consumer that you get clear on when is the date that your term ends in general. And again, this is a broad paintbrush kind of description. Typically, you can reach out to your lender and inquire about your early renewal options on that loan, your renewal, without qualifying, okay, not remortgaging, not refinancing with another bank. I mean, renewal typically 120 days early, roughly four months before the renewal date, is when you can start having those conversations with most lenders. So I would encourage everyone that you put a booking on your calendar for the renewal date, and then you put a booking on your calendar for roughly four months out to begin initiating those conversations and see what your options are, because you might be able to make an early renewal decision in a still changing rate environment. That's to the benefit of you and your family that you can make a peace of mind decision on. Okay, so there's a little tidbit for everybody. Now, additionally, that when you got your loan, Henry, that was approximately, let's just say two years ago, roughly speaking, from when we are having this conversation, give or take. And so if you're on a five year term, you've got roughly three years left. Well, from the date that you got the property to five years from now, there's already been a high degree of variability on the interest rates versus what you had versus what it might be like in the next three years. So by having the ability to access capital from your external third party, private family banking system, what some people will even do in the spirit of recapturing that debt is maybe they'll hold on to a measure of liquidity in their system. Then prior to the renewal, if we see where the rates are, hey, they had an interest rate when they got their loan at 2%, and they go to renew, and now they're renewing a volume of money, but they're renewing it at, say, 6%, so their payment will likely jump up substantially when they go to the next renewal. Well, if you have access to a large amount of capital, you can make a large, in theory, lump sum deposit on the principal balance of that loan right before the renewal date. Now you're affecting the total balance at renewal, and even though the rate is higher, the volume of money is lower. And so you might be able to create payment equalization, some stabilization on the total monthly payment. So that's a way that you can exercise a measure of control over your financial circumstances by building a capital pool that's external to the current banking system that you operate in. And now you're doing that on a more regular basis. Some people may do it on a more ad hoc or maybe yearly or cent or maybe once every couple of year basis so that they have a little bit more liquidity in place. Obviously, if they had liquidity with a home equity line, that's a different story. Now, given your letter, we're seeing that that's being trimmed away by anywhere from 10% to 30% lower liquidity access. And so I know you want to chime in on this, but one of the questions I have for you, Henry, I like to discuss is what are some of the overarching reasons that you feel that this letter came about? And I'd like to hear some of your comments, and I'd like to volunteer some of my own.
• 21:26
  Speaker C: I'll go with that comment first. My first comment is that we have to recognize the fact that the last ten years, eleven years there was an environment where interest rates were really low. And with interest rates really low, we've got to go back to the source of the components and the economics of our monetary system in Canada, which is controlled by the central bank of Canada and the federal government, and they issue something called monetary policy, which is just on a very simplistic terms, they have different definitions, m one, two, those type of definitions of money. But if I were just to say, they have policies on how much volume of money they're going to push into the economy. So they've saturated the economy with a lot of money, and now that money is backed by the promise of the government of it being something valuable, and with that promise of it being valuable, well, if there's such a saturation of volume of money, that means, Richard, you may have a lot more money. Now. Even you feel richer because you have the quantity of money much higher, but the value or the worth of it is much lower, because you can walk into a grocery store right now and you can see like a head of lettuce just on a gross, speaking like sets of romaine. Lettuce is like $10 for three now, at least in Toronto, that I see. Right. And so that volume, everything that you used to get, you need five times what it used to be to pay for that. And now with them realizing that they have monetary policy, which, in essence, it's kind of like a company having a set of rules and policies on what's acceptable or not acceptable or how company policy works, monetary policy in the economy behaves in that same way. They've saturated the economy with so much money, now they need to retract to keep things normal, as they say. They want to control inflation, so they're shrinking the quantity of money that's available because of how much they issued in that first place. So that's also what my opinion is in terms of where they were going first. From just a money saturation standpoint, they've lended out a whole bunch. Now they're starting to retract using this particular case study of myself in terms of HELOC. Instead of me getting my 100% of my HELOC accessibility, they're only giving me 70% to 90%. And I love how they have done this because they don't know what the state of the economy is. So they're already planting the seeds with the fact that if things are even worse than, they're not contracting the money supply in the level that they want, in my opinion, they're going to move it to 70%, because that will accelerate the pace of how they can shrink the amount of money supply. And when they shrink the amount of money supply, that means fewer people have less money and there's fewer transactions that can be made because of that.
• 24:37
  Speaker A: I agree with everything you said there, and I want to expand on that from my vantage point, because of the low interest rate environment, which, again, was created because it was to spur on the economy, which was sluggish. So we have forces that are somehow in a hierarchical, tiered format in monetary policy, that are manipulating the rate environment by setting this rate monetary policy, which has causal impact to what the overall marketplace does. And so you have a drop in rates. Well, the purpose of that drop is to spur the economy going, and people spending money in different ways and borrowing money. And if you can borrow a lot of money at a really low rate, it seems logical to do that in that short time frame without thinking much about the long term impact. And so you borrow a whole bunch of money, banks, give it away freely. It's easy to get easy credit. And then what do you do? Well, you go spend it. You spend it on things like home renovations and buying cars and vehicles and boats. And a lot of people will spend it on the purchase of investments such as investment real estate or stocks and whatever. And they'll implement things like the Smith maneuver to help them get ahead financially. Well, what does that cause? It causes a drastic increase in the stock market in general, broad terms. It causes a drastic increase in property values in general terms, based on where those in given marketplaces, and you live in Toronto marketplace, we've seen that huge increase in the values. I mean the increase. If you bought your house, Henry, ten years ago, what do you think the price of the house would have been at that time? Ballpark it for me.
• 26:25
  Speaker B: Become your own banker and take back control over your financial life. Hey, is this even possible? You may be asking, can I even do this? Well, you better believe it. In fact, it's easy to get going. So easy that we put together a free report. Seven simple steps to becoming your own banker. Download it right now. Go to sevensteps ca. That's seven steps. Ca. Now let's get back to the episode.
• 26:55
  Speaker C: A lot less than what I paid for. More than half what I paid more.
• 27:02
  Speaker A: Than half of you. So we could drop a zero off the back end of that house price. Almost.
• 27:07
  Speaker C: No, I would put a half or even ten years ago, the house that was across from me paid 40% of what I paid.
• 27:21
  Speaker A: There we go. Ten years ago, so we can have that as a bit of a barometer, a measuring stick, and that time frame goes hand in hand with the manipulation of that money supply, artificially suppressing interest rates down, allowing easy credit, easy access to money, which allows people to buy and buy and buy more. And then if there's a lot of buying activity, well, then there's an increase supply and demand, there's an increase in prices, et cetera. And so a lot of that is driven by the market fervor, not driven by market fundamentals. Okay. And so one of the reasons I think that you receive this letter is the lender. And I imagine this will be common amongst most of the lenders in the country, that people will be receiving similar letters and notices, at least in geographic locations like the Toronto marketplace, because there's been a vast increase in the market values driven by the rate environment. As interest rates are low, property values, generally speaking, tend to rise because of the buying frenzy. As interest rates go up, there often is a correlated effect, not always, but often, that it may put pressure on property values to come down or to level and potentially begin to reverse to some degree to a normalized value. All right, so I don't think that the lender wants to be on the hook for borrowing potential on a possibly declining house value, because the lender's risk is based on the house value. And if the lender needs to recover their money, they can only recover it from what the house is worth. So if they have to recover for the primary first mortgage and the secondary instrument of a home equity line of credit, they might want to limit the potential of what that line of credit gets to so that they preserve on their books their safety net, so that they can appease their shareholders every quarter about what they're doing to diminish and derisk some of their lending portfolio that they have in hot markets.
• 29:23
  Speaker C: Yeah. And the other part, I just would add, is that the base of what is determining the lending criteria is coming from the market value of the home. And if you are now giving interest rates at the rates that they are right now, and part of them also contracting the money supply, meaning the banks are not going to be willing to lend anymore. That ability to get that into the buying frenzy and the fear of missing out fomo all of those emotions are not as what was pushing up the prices in the form of euphoria is now coming back down. And if they're contracting the money supply, not everyone's going to get access to money anymore, to borrow, to buy these properties or the assets or whatever it, you know, going back to your comment, Richard, this is kind of what people talk about in the euphoric stage, the asset bubble. Now it's kind of coming back down into some normalized level.
• 30:28
  Speaker A: Yeah. So we talked about, let's take a look. We're going to go 15 years back, and we're going to go in our memory banks and we're going to look back to what we remember seeing in headlines and learning about the 2008 global financial crisis. Well, it was a financial crisis that everyone said was some prime had to do with crappy mortgages and an overinflated real estate marketplace. But the reality is there's lots of movies and stuff you can watch in documentaries about how the problem actually began much earlier than that, all because of the manipulation of market interest rates, which then led to the causal impact of a bubble that blew up and then burst. But here's some things around the home equity line that I want to show. So I'm going to bring up my screen here. Here's an article from 2000 on CNN Money from 2008, April 21, 2008, when a HELOC freezes over. And so just a couple of blurbs here. So this is going back 15 years ago now, April 2008. And as of September of this was 2007, delinquencies on helocs are up 47% year over year. The numbers were expected to worsen 2008. In response, countrywide has already suspended an estimated 122,000 lines. Home equity lines suspended, meaning you used to be able to access that line of credit to do for emergencies and whatever, and then all of a sudden you went to go and access the line of credit as a homeowner and you just couldn't do it. It was suspended, done. You can't tap into.
• 31:59
  Speaker C: That. Even though this is the US. This is very shocking to me, the fact that they could do that.
• 32:06
  Speaker A: And this happened across the board with multiple lenders. So here it lists several other know, including bank of America, Citibank, Chase, and a whole number of others. Not all helocs were frozen or downgraded, but some lenders could will scrutinize your account. So this is an article in 2008. Now, over the preceding bit of time, there were several of that process continued because the problem didn't get solved in 2008, the problem extended beyond that. So even in the 2009 and 2010, that type of activity was still happening. And I remember speaking to colleagues of ours in the United States, and they were telling me stories from clients and experiences that they had of people that they know where because the property values were this unrealistic, not really true value. It was a value on paper. The real value is what a willing buyer and a willing seller are willing to agree to on the purchase of a property. So when the property values came down and they were over leveraged on the Heloc potential, they just said, no, I'm sorry, you can't access that HeloC anymore. You're done. And they would just freeze it. And they would either say, because it's what's referred to as a demand loan, we the lender, we who have the gold, who have all the money, who have given you the ability to tap into this pool of money that's ours, we demand repayment of it. Right now. That's a demand loan, meaning that you have no choice in the matter. You have to fulfill to that demand. You either have to sell the house, and if it's over leveraged, you're not going to be able to do that, which means you're going to be carrying some of the debt with you, or you're going to go bankrupt. That happened for a lot of people, or you need to figure out some other way to pay that environment or in some circumstances. They worked with the homeowners, and they restructured that debt into a new, amortized, let's say, second mortgage with principal and interest payments spread out over a period of time. So that's what happened for a lot of people who've experienced that. So your letter that you told me about today, Henry, it brings up these memories of a past experience that we've already had not that long ago. 15 years is not a lot of time where we've seen this type of activity before. Now, did we see this in Canada? I don't recall hearing anyone in Canada that experienced that. However, I remember speaking to many people in the states that did and seeing a lot of the articles. And coincidentally, I have another article here from, this is actually the Globe and Mail in Canada. This is from 2020. I'll just bring this up real quick so we can show it.
• 34:32
  Speaker C: I just want to add the fact that you're showing all this. One main thing that I'm taking away is that they are the one in control. We're not talking about rate of return, rate of interest, investments, or anything. This is what keeps me up at night that I have something that I'm not in control of, and this very much keeps me on the ball all the time.
• 34:59
  Speaker A: Yeah. And this is April of 2020, which is a little over three years ago. From the time of this recording this was in a pandemic world, talking about Helocs being an emergency lifeline for people. But if we go down further, the article, here's some facts, and these are facts as provided by the columnist. Of course the interest rate can be increased. Well, people are finding that happening right now. Lots of people. We just had a rate increase a few weeks back here. Credit limits can be lowered. So this is a scenario that you just encountered, fundamentally with your announcement. The way that they're doing the credit limit reduction is unique. I've never heard of that before. But effectively it's a credit limit reduction is what's taking place.
• 35:40
  Speaker C: I'm just going to add, interest rate can be increased. This is not just for HeLOCs or any type of loans. This is just loans that you have. They can change because the banks will give you, let's say, a line of credit that is based on prime plus some percentage of markup on top of it. So for some, like, I've had a line that was for prime plus 1%. Now it's transformed to suddenly be prime plus 5%. So that is a very stark example that I'm personally sharing. That's what I was so shocked. I was like, what in the world? They can just change that?
• 36:20
  Speaker A: I'm really glad you brought that up. So people are experiencing increases in the rates because they're at, let's say, prime plus 1%. And so prime has gone up. So they're experiencing that increase. What you're identifying is a completely separate increase where they've totally changed the ratio of how much above prime. They're going to charge you without your consent or permission or acknowledgement. It's just a letter saying, hey, by.
• 36:46
  Speaker C: The way, Henry, here's what's up.
• 36:49
  Speaker A: Good luck with that.
• 36:50
  Speaker C: Hope you get there.
• 36:51
  Speaker A: Thanks for being a customer of ours. We really appreciate your business. You're a valued customer. You know what I love is I love getting those letters that makes you feel so valued and how nice this change is going to. They try to put lipstick on a pig and make the letter sound like it's the best thing since sliced bread for you. But the reality is it's kind of like a knife in the back. It's like they should just send the knife with the letter and say, do you want to stick this in or do you want us to do it for you? Being a little bit facetious, but that's my opinion. So going back to this article here again, HeLocs could be.
• 37:23
  Speaker C: Yeah. The other two that you're showing are just further down the chain that have not actually happened yet. But these possibilities exist. And again, this twisted me in the stomach very badly.
• 37:40
  Speaker A: That's because these home equity credit lines, because they're not a fixed principal and interest payment, they don't have that the same contractual level as your base mortgage contract does, or like an auto loan would have a personal line of credit or home equity line of credit. These are on demand structures. On demand, meaning on demand the lender can request, they can demand repayment. That's just all there is to it. Payments and terms can be changed. The standard HELOC requires a minimum monthly payment of interest only lenders can require a switch to a mortgage type loan, where payments are a blend of principal and interest. Now, this is just interesting. This is data going back to, I think, January of 2020, when this was reported. HeLOC balances 268,000,000,000. That's an awful lot. I'm pretty sure we had a rapid increase since that time frame in the Ontario real estate market space. And I'd venture to guess that the level of HELOC balances across the nation have gone up dramatically since then, especially since the rate rise environment has happened. And some of the other economic factors that we're seeing at the time of this. I don't know the exact numbers, but I know the debt to income ratio in Canada is one of the most abysmal in all of the g seven nations currently. The kind of debt bubble that's facing the canadian economy is not a good one. And so why is that important? What's important? Because we need to take more personal responsibility over these things in our life, and we can't expect a the government or some other higher power to go look after it for us. You need to take that control back at the you and me level. That's what the process of becoming your own banker is all about, so that you don't have to be beholden to all of this other white noise and environment that you have no control over. No control over the rate environment, no control over the repayment terms, no control over the use and liquidity of your capital, all of these types of things, and no control over the economic factors either. So by taking some of that on your shoulders, through your own profitable mechanism of becoming your own banker, you can slowly, incrementally step yourself away from a system that, in my opinion, is not designed to support you.
• 40:05
  Speaker C: Yeah, and I wanted to go specifically back to those last two points that you showed in the article where helocs can be recalled. This part is very troubling if, for Canadians who have and are over leveraged in their usage of helocs, because one of the key things that people are not aware about is that if the borrower experiences an event that engages their ability to pay, or the borrower's property falls in value, because that's what was granted in the first place. The property was used as collateral to determine that value. Lending that lending amount to value to lend out. If they feel there's a threat to that value, they can recall that HELOC. And what does that mean on demand? They will ask you to come up with the money. They don't care how you come up with it, to repay that drawn HELOC. And for a lot of Canadians who are not in that position, as you mentioned, Richard, this is where you've got to really start looking at building up your store of equity, of value. So that in the events that you are overexposed in that situation, that is very important to recognize, to realize if that were to happen again, the bank's in control, what are you going to do in that situation? I think it's completely ignorant to think that it won't exist. It's very possible it can exist. And then that last one is payment terms can change. So what you initially were floating by monthly on paying the minimum monthly interest, they can just suddenly switch to say, we want you to pay a blend of principal and interest, where, again, when you structure a loan from a HELOC that is variably open and re advanceable to an amortized loan, even though the payment is easier to digest, potentially the volume of your dollars that you're paying at $1,000 80% now goes to interest and 20% goes to principal. It doesn't matter what the interest rate is, because the structure of the loan that you have has suddenly changed negatively, not in your favor to pay more dollars in interest and you're still sending $1,000 but only 20% productive, that is how limiting of an impact this is going to make you work harder for things that it's not going to work in your favor.
• 42:47
  Speaker A: I'll use this example to tell a couple of personal stories, because we're talking about some history here. And so I have my own personal examples of this, not with the credit line specifically, but with the impact of being over leveraged on property. Two examples. So, going back to the 2008 financial crisis, I signed a contract to have a home built in an area in Edmonton in July of 2007. From 2005 to July of 2007, the Edmonton marketplace experienced a monstrous real estate boom. I mean, we're having 30% year over year increases in real estate. It was a massive spike and now I had some good things happen during that time frame. But I signed the contract and everyone was wondering how long is it going to take and when's the bubble going to burst and all these kind of questions. I did need to go get a new property and I wanted to buy one in a strategic area in southeast Edmonton near a major transportation development. I went and signed a contract to build that property. And when I finally took possession of the property in the following May, it was almost June. So it was not quite a year later that property value was $100,000 less than what I owed on the mortgage. So I signed the contract 2007. I took possession in 2008. And if I wanted to list the property with a realtor and pay realtor fees, the list price would be $100,000 less than what I owed on the property. Does that sound like a good real estate deal to anyone here watching? Go ahead, type in the comments. It's okay.
• 44:27
  Speaker C: Not at all.
• 44:28
  Speaker A: So I still have that property today, and only now, 15 years later, can I reasonably sell that property for basically more than it's worth at the time. I got a 40 year amortization. They were offering those then, and I did that for a variety of reasons because I thought, oh, I'm going to want a lower payment. I'm going to eventually turn this, I'm going to live here for maybe one or two years. I'm going to turn this into a rental property. I had a big plan. None of those things that I planned came to fruition. Not a single one of them. Okay, so I still have that property today. And realistically, with paying realtors, realtors and payout expenses or whatever probability is, I wouldn't walk away with much. I wouldn't even get my original down payment back on that property today, 15 years later. Now I have another property. It's located in Fort McMurray. And unfortunately, I can tell you a lot of horror. We could spend a couple of hours just talking about some horror stories about being on a condo board and reviving, pulling 150 land titles to basically do a hostile takeover of a condominium board so that I could try to revive this complex. But anyhow, this is a complex that I've been an owner now since I think 2002, maybe roughly 2021 years roughly. And the original purchase price of this property was around $79,000. It's a one bedroom, pretty crappy small apartment in downtown Fort Murray. Now, shoot forward to the boom years, and at one time, that property appraised for $230,000. We did an equity refi at that time because we had some other uses for that capital to do something else. We had a lot of capital tied up in that property. We wanted to go do some other things. Now, today it's 2023. If I wanted to sell that property today, I don't think I could sell it for $30,000. I might be able to get 40. And then after closing costs or whatever, let's just say I end up with 35. But the loan after the refinance that we owe in that property is $62,000 today. So I would have to stroke a check of an extra $30 to $35,000 just to walk away from the property. It doesn't make sense to do that, even though the property negative cash flows, and it has actually for several years now, which is why we did a hostile takeover to try and revitalize the property. That's all going well, by the way. So I have two properties that have been, or one that's presently in an over leveraged position. And although those aren't helocs, if they were helocs, the bank could easily come and demand me. If they were aware and they spot checked that they could demand that I cut them a check or force me to sell that property in some way. They are on regular mortgage terms, so I haven't had that issue. But they are definitely over leveraged, and it also means I can't refinance them. You can't refinance something that's over leveraged. So I'm stuck with that current lender until I buy out those balances in some other way. And because those are rental properties, it hasn't really made sense for me to go do that. I've got other uses of my capital that I'd much rather put it to work on that's more financially viable for me. So, that being said, I'm personally aware of these experiences. I personally was impacted by the market downturn in 2007, 2008, as were many other real estate investors and many other just general homeowners. We are seeing similarities to what transpired then transpiring now. This isn't about creating fear. This is about creating awareness. The more that you have a heightened level of awareness about your financial circumstances and the things that are happening as it relates to your needs, the more we can raise the level of understanding about how you, as a listener, need to take control. Over this situation from your vantage point.
• 48:10
  Speaker C: Yeah. And if we look at just a standard real estate transaction, again, going back to a mortgage, 20% is funded by you as a down payment. So if properties fall 20%, the bank is still covered whole. The properties, if you have a HELOC, can fall down to 65%. The bank is still going to have protection in their money because they already know, they've already put a lien on all of your income that is going to go to them. And the part that you're talking about, Richard, is what we coach clients every single day, working on building their own private banking system, because they're filling up their system with money while they're in a position of debt. And each time using me as the example, taking money from my system to pay down the debt brings my risk down every single time. And every time I can start bringing the risk down, my system is still growing because I'm trying to build the capacity to eventually have enough that I don't have to rely on traditional creditors anymore. I don't want to ever be in that situation where suddenly they can change the interest rate on me, just as they already have done. They can lower their credit limit. Whereas your own banking system, the amount of money you access, continues to grow. My HeLOC could get recalled, whereas here, your ability to access money cannot be recalled and payment terms can change. Well, they are already doing those for a lot of people already. So these are all of the circumstances. You can't put a value on control. You can look at illustrations, you can calculate any numbers that you want to pull from the sky to compare one product to another product. What you cannot quantify is the value of control. And this is the part that I really wanted to make sure. The lesson is that the more reliant you are on that credit system, the more exposed you are for them to pull the rug under you.
• 50:11
  Speaker A: And I'll go one step further than the value of control. Well, you and I both know that getting a decent amount of sleep is conducive to your health. And if you don't get very good sleep, your health is impacted, and then that adds stress, and then you get a compound effect of that. So if you actually want to improve your health, you probably need a good sleep. Well, one of the things that impacts people's sleep is how much they worry about money, how much they worry about banks changing the rules when they get a nasty letter like that, that creates a lot of unnecessary stress. And so what's the value to your health, to your life, to your peace of mind, to your ability to have a good night's sleep simply by being aware and the knowledge that you have a heightened level of control of your financial circumstances. In my opinion, that's priceless. But you make your own decision as a listener and you tell us what you think the value of control is. Thanks for joining us on this wonderful session. We appreciate it. And take a look at the next video that just popped up down below. There's more good stuff to learn. And of course, if you haven't already, make sure you go get a free copy of our book cash follows a leader by going to cashfollows.com and you can download a copy right there. Thanks very much.
• 51:21
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• 51:25
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• 51:31
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• 51:32
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• 51:36
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• 51:38
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