Recently I wrote about how your bankruptcy score, a rating that predicts the likelihood that you'll become insolvent, could affect your ability to borrow. This rating, just like your credit score, is created by Equifax and TransUnion and is based on your credit and payment history. It's another tool designed to help lenders assess your credit worthiness.
Lenders can see your bankruptcy score, but you can't, and now with the announcement of the new partnership between Teranet and Equifax, there will be another measurement that could also impact your credit worthiness.
Teranet, the exclusive provider of land registration in Ontario, and Equifax, one of the major credit bureaus, are providing financial institutions with Real Estate Secured Lending (RESL) and property insights on Canadians. In other words, Equifax will combine credit histories, ratings, and mortgage information with Teranet's database of property values to offer lenders and financial institutions an assessment of a borrower's debt-to-asset value and home equity. This RESL metric will help lenders measure risk in the real estate market, allowing them to determine if they want to lend or not.
I suggest, no matter what your credit score, bankruptcy score or RESL rating, that you should always borrow wisely according to your own comfort level.
So what does this mean for the average home-owning Canadian? It could mean that in addition to your credit rating and bankruptcy score, lenders and financial institutions may also use this new RESL metric to assess your credit worthiness, potentially making it more difficult to borrow if you have a lot of debt, or easier to borrow if you have a lot of home equity because of rising real estate prices.
Is this a good thing? It's debatable -- it could help establish better borrowing limits on those with excessive debt relative to their assets, forcing them to deal with that debt sooner. However, while this is just speculation, it could also be used to extend credit in circumstances where they may have said "no" in the past, depending on the amount of equity in the home and the property value.
This is concerning when we consider that the Hoyes, Michalos, & Associates' 2015 Joe Debtor study revealed that carrying a mortgage ratio of 90 per cent or more places an indebted homeowner at severe risk of becoming insolvent. This risk would be just as high if this debt was unsecured debt as opposed to mortgage debt. And what happens when real estate prices drop? Will people who found themselves with good credit suddenly find themselves facing higher interest costs since their creditworthiness will now be linked to any volatility in the real estate market?
Ultimately, we don't know what impact these new insights will have on the average Canadian's ability to borrow. What we do know is that they are designed for the benefit of lenders, not borrowers. I suggest, no matter what your credit score, bankruptcy score or RESL rating, that you should always borrow wisely according to your own comfort level. Only use credit or loans for their intended purpose, and pay balances off quickly to avoid paying interest. Also, pay attention to the interest rates and pay more than the minimum payment. Make sure that you are not allowing the balances to build up once you have paid them off.
No matter what your home equity, I always recommend only borrowing what you think you can afford and paying off debt sooner rather than later. For those who are struggling to make the minimum payments, don't think you have some breathing room just because you have some equity in your home. It's better to preserve that equity for yourself, rather than consume it with more debt.
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