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You're poorer than you think

Logo courtesy of RateHub

When we purchased a house in Kelowna a few years ago, I was amazed at the lightning speed with which banks would extend my line of credit.

True, the provincially assessed value of the house did triple inside of six years, but it was still shocking to see the credit offers pour through from our lender, not to mention these mysterious mailings to offer even more rope to hang ourselves with.

Now, thanks to a Globe and Mail investigation, turns out the very mechanism for churning out those Home Equity Lines of Credit (HELOC) might be fatefully flawed. The culprit is a computer program known as Emili, an “automated system that uses figures such as recent sales of nearby homes to gauge values, without sending an actual appraiser to the address...The potential margin of error in calculations may pose significant problems…could allow them to overpay or borrow much too heavily on the home.”

Emili is used primarily by the Canada Mortgage and Housing Corporation, the largest mortgage insurer in the country. Though mortgage defaults are still rare in Canada, reckless borrowing on HELOCs prompted by rapidly rising real estate values in the United States is partially to blame for the financial crisis of 2008. 

Most people utilize HELOC—which are usually a point or two above their negotiated mortgage rate—to do home renovations which may increase the value of the house. A real problem occurs when mortgage debt is used to finance credit cards at a lower rate, or, worse, if the debt is used to leverage investments in, say, the stock market or by putting deposits down on condos that have not been built yet. Known as ‘high illiquidity’, these loans can be extremely difficult to payoff quickly and can have a devastatingly cascading effect on the housing economy, as meltdowns in Nevada, Ireland, and Spain have proven.

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