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.