It’s sometimes hard to understand why HELOC rates are still high, while variable mortgage rates keep falling.
We asked RBC this question because, just yesterday, it raised its HELOC rate by 1/4%. Prior to that, it led the industry since October at prime + 0.50%.
Spokesperson, Gillian Mcardle, said:
“We base mortgage product pricing decisions on a number of factors — these include not only funding (cost) and risk factors, but also strategic, business decisions to differentiate ourselves in the marketplace.”
McArdle says that RBC “characterizes (its HELOC rate change) as having ended a special rate offer and moving back to our everyday low pricing.”
She also confirmed that RBC’s new HELOC rate of prime + 0.75% applies only to new lines of credit within an RBC Homeline Plan. RBC’s existing lines are not affected.
In general, HELOCs come with a bit more risk and higher funding costs than a regular variable-rate mortgage, so they’re rarely as aggressively priced.
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Sidebar: It’s not that common for big banks to make prominent announcements about HELOC rate increases. RBC’s decision to issue a release on this rate change was, therefore, somewhat interesting.
HELOCs also compound daily instead of semi-annually, right? So that makes an increased cost even at the same rate.
What are the risks to a HELOC? Default, is that what you are referring to? I’ve asked this before, but what sort of case can be made to having a HELOC rate cut vs. someone that has no chance?
I have 50% carried on a HELOC now and I understand this to be a bad thing since they have to hold the entire amount in case I do take it. Does this put me in a bad position with them?
Chris, not a risk so long as you pay the interest. With a mortgage the bank can offset the mortgage disbursement with a bond, for a set period of time. With a HELOC, the bank has to have the funds available to fund the entire limit of the heloc no matter what the balance of it is. Hence costs are higher to have the available resources to fund it on any instance.
In addition to what K said, there is higher default risk with lines of credit because they are revolving and non-amortizing (interest only).
There was an article on this site a while back that mentioned that there are variable rates as low as prime – 0.4% as well as 5 year fixed terms for 3.69%. Any chance someone has some contact info for the brokers offering these rates?