June 28, 2023
Using revolving credit and HELOCs can help you improve your financial situation if used correctly. Discover how to use a HELOC to your advantage here.
Revolving credit comes in many forms, from credit cards to lines of credit, offering flexibility to borrow and repay as needed. Among these options, home equity lines of credit (HELOCs) stand out as a unique type of revolving credit specifically designed for homeowners.
HELOCs are a popular way for Canadian homeowners to borrow money. It’s not hard to see why; they have low interest rates and can be used for basically anything. But what are they exactly, and how should you be using them?
Revolving credit gives you ongoing access to funds up to a set limit. Unlike personal loans, which require fixed monthly payments over a defined period, revolving credit allows you to borrow, repay, and borrow again as needed, as long as you stay within your credit limit.
Revolving credit can be a valuable financial tool when used responsibly, offering flexibility and convenience while helping you build a solid credit history.
A HELOC, or home equity line of credit, allows homeowners to borrow against the equity in their home. It functions like a credit card, providing a revolving line of credit that you can draw from as needed.
To calculate your home equity, subtract what you owe on your mortgage from your home’s current market value. For example, if your home is worth $500,000 and you owe $400,000, your equity is $100,000. Lenders typically allow you to borrow up to 65% of your home’s equity, or in some cases, up to 80%, depending on your financial profile.
HELOCs usually come with variable interest rates, which are typically lower than credit card rates or unsecured lines of credit. However, these rates can fluctuate, so it’s essential to consider this when taking out a HELOC.
If you fail to make payments on a HELOC, it can lead to foreclosure since it is secured by your home.
However, when used responsibly, HELOCs can be a smart financial tool—for example, funding home improvements that increase your property’s value or consolidating higher-interest debts into a single, lower-interest payment.
As anyone who has ever done a home renovation will tell you, they are EXPENSIVE and full of unforeseen challenges.
This is why one of the most common ways to use a HELOC is for home renos. HELOCs allow people to borrow large amounts of money at a low interest rate, making it ideal to pay for big construction projects on their home.
Using your HELOC to help pay for renovation is a responsible way to use the HELOC for one simple reason: doing renovations on your home will increase the value of your house. Using your HELOC to pay for the renovations is an investment that should pay you back in the long-term if you choose to sell your house.
A HELOC can be an effective tool for consolidating high-interest debts, such as credit card balances or unsecured lines of credit.
Debt consolidation involves combining multiple debts into one by using a lower-interest credit source to pay off the higher-interest balances. This strategy simplifies your payments and can reduce the amount you pay in interest.
With a HELOC, you can access funds at a much lower interest rate compared to most credit cards or personal loans.
By drawing from your HELOC, you can pay off high-interest debts and replace them with a single, more manageable monthly payment. This approach not only helps you save on interest but also streamlines your finances, making it easier to track your repayment progress.
While a HELOC may work like a credit card, with a set limit you can borrow within, you should not use it like a credit card. Buying a new home theatre system, or a trip is not how it should be used.
Using a HELOC to pay for non-essentials is a sign you’re spending beyond your means. While the interest rate on a HELOC is lower than of a credit card, it is still a form of debt. Using debt to buy things you want without being able to pay it off quickly only creates larger financial problems down the line.
Education is expensive. Many families struggle to save up the money for college or university education. With the low interest rates on HELOCs, it can be tempting to use one to afford the payments.
The problem here is a HELOC is tied to your house. If you can’t afford the payments, you can lose your house.
Student loans are a safer and more practical alternative. These installment loans allow for regular, manageable payments over time, and you can make lump sum payments to reduce the debt faster if you choose.
The federal government also stopped charging interest on student loans in Canada in 2023, making student loans a much better option than a HELOC.
With a second mortgage instead of borrowing funds as you need them as you would with a HELOC, it is a lump sum amount deposited directly to your bank account.
As the name implies, a second mortgage is an additional mortgage on your home. You can borrow up to 80 per cent of your home’s value, minus what is still owing on your first mortgage. You are then responsible for making two regular mortgage payments.
The benefit of a second mortgage is you’re obligated to make regular monthly payments. Just like your mortgage or any other bank loan, your payments chip away at the original loan amount. The downside is that you may be taking on more debt than you actually need.
Like a second mortgage, these options let you borrow up to 80 per cent of your home’s value minus what you still owe on your home.
Whichever method you choose, your loan amount will be added to your mortgage balance. You may or may not end up with a lower interest rate on your mortgage, but your monthly mortgage payment will increase.
Just because you can borrow up to 80 per cent of your home’s equity doesn’t mean you should. Borrow only what you can afford to pay back. If you’re struggling to pay back your HELOC or realize it won’t help you get out of debt, a Licensed Insolvency Trustee can help you review all your debt relief options.
The first consultation with one of our Trustees is completely free.
June 28, 2023
Using revolving credit and HELOCs can help you improve your financial situation if used correctly. Discover how to use a HELOC to your advantage here.
