Achieve your long-term financial goals with your home equity

Achieve your long-term financial goals with your home equityYour home has the potential to build your personal wealth over the long term. If used prudently, a home equity line of credit (HELOC) can help you reach your financial goals.

But with a HELOC, you might be tempted to use your home as an ATM. You need a plan to use this line of credit wisely, and be aware of potential risks.

Home ownership can be a great long-term investment strategy, especially if housing prices rise. Your mortgage debt goes down, because you make regular payments against both the interest and the principal borrowed. This increases your home’s equity — the difference between what you still owe and the value of your home. A HELOC lets you borrow against this growing equity. With this form of debt, you can delay repaying the principal balance as long as you cover the interest each month. However, this short-term credit advantage can mean a long-term debt problem.

Ask yourself if a low interest rate and easy access to credit may encourage you to spend more than you can afford to pay back and jeopardize your long-term financial security. For example, if interest rates continue to rise, will you have trouble keeping up with your payments?

Avoid a debt spiral where you could find yourself using additional home equity just to stay current on your mortgage. Here are some tips:

Establish a repayment plan. Try setting aside a portion of your HELOC in a sub-account with a fixed-term repayment schedule, so you pay more than just the monthly interest.

Develop a plan for how you will use a HELOC. This includes making a realistic budget for any home renovation projects you are funding.

Create an emergency savings fund. Using a HELOC for an unexpected circumstance, like job loss, carries risks if you need to use it to cover your monthly bills for an extended period of time. What you need is an emergency cache.

Learn more about HELOCs and find useful financial planning tools online at canada.ca/it-pays-to-know.

What do rising interest rates mean for your home?

What do rising interest rates mean for your home?There has been a lot of buzz about rising interest rates, which have increased since last summer after remaining quite low for seven years. If you’re like many Canadians, you may be facing staggering levels of household debt.

If some of your credit products carry variable interest rates, you have cause for concern. For instance, home equity lines of credit (HELOC) typically offer relatively low, variable interest rates. According to the Financial Consumer Agency of Canada, HELOCs represent a significantly larger portion of household debt than credit cards. If you’re already living paycheque to paycheque, even a small increase in your HELOC interest rate could make it tough to make your payments.

With flexible repayment terms and a credit limit that may increase automatically as you pay down your term mortgage, a HELOC can be part of an effective strategy to pay off other, higher-interest debt. But if you opt for this route, know that banks may approve you for a higher limit than you need, making it tempting to overspend. Consider negotiating a lower credit limit that does not increase as you pay down your mortgage.

Lower your risk of finding yourself in over your head and create a plan to pay down the principal amount borrowed on your HELOC over a fixed period. Aim to pay more than the minimum payment or interest every month. With a HELOC, there is usually no penalty to pay back as much as you can at any time.

If you think your spending habits are the cause of your existing debt, follow a budget and avoid using your home like an ATM.

Learn more about how to manage your HELOC wisely online at canada.ca/it-pays-to-know.

Renegotiating your mortgage?

Renegotiating your mortgage?There’s so much to think about when renegotiating your mortgage. You may be shopping around for the best rate, you may have to pay fees to switch lenders, and your bank will likely offer you a readvanceable mortgage.

Some banks bundle other financial products, like car loans or credit cards, together under a readvanceable mortgage — a term mortgage combined with a home equity line of credit. This is typically offered at an attractive interest rate.

While a readvanceable mortgage has its benefits, be aware of the fees that apply and the risks of tying different credit products together before signing on the dotted line.

HELOC debt is different than other forms of debt. Unlike a credit card or unsecured line of credit, a HELOC is secured by using your home as collateral. While HELOC interest rates are often lower than other forms of credit, they are variable. At any time, banks can demand that you repay your HELOC or increase your interest rate. If you can’t pay back the money you owe, you may lose your home or have no choice but to sell it.

Compared to a home equity loan — a lump sum loan with a fixed interest rate, term and repayment schedule — a HELOC works more like a credit card. Your available balance decreases as you borrow and increases as you pay it back, up to a certain credit limit. Some HELOC credit limits increase automatically as you pay down your mortgage.

To switch lenders the next time your mortgage is up for renewal, you may first need to repay all credit products tied together under your readvanceable mortgage. And there are additional legal fees you wouldn’t incur when moving a traditional mortgage.

When deciding your strategy, think long-term. Are you planning to use your home’s equity to fund your retirement? How long do you plan on staying in your home? How will you use your HELOC — for renovations, to invest, to consolidate higher interest debt, for emergencies, for a second home, for a vacation? How would interest rate hikes, job loss or illness impact your ability to repay your debt? Would a HELOC tempt you to use your home like an ATM?

If a HELOC is the right product for you, stick to a plan to pay it off fully and avoid continually borrowing against your home’s equity. Learn more online at canada.ca/it-pays-to-know.