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.