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Housing and debt associated with housing are very romantic to Canadians. Before their quick decline caused by rising interest rates, housing prices in Canada (and around the world) reached all-time highs during the worldwide epidemic.
Homeowners have had access to increasing capital by using a home equity line of credit to draw from the value of their property (HELOC). But should they be welcomed or feared with rising debt levels in Canada, fluctuating housing prices, and rising interest rates?
How Do HELOCs Work?
Homeowners can borrow money from a HELOC at a less expensive rate than an unsecured loan. A homeowner may borrow up to 65% of their home’s worth under HELOC regulations. Homeowners only need to repay the interest accrued on loan; there are no penalties for paying off the loan early.
With readvanceable mortgages, a HELOC and a mortgage are combined, allowing the borrower to keep making principal payments while only paying interest on the HELOC part.
According to the Bank of Canada, the total amount of these loans during the first quarter of 2022 was $737 billion. Stand-alone HELOCs are separate from your mortgage and function as revolving credit secured by your home. They generated in the first quarter of 2022 was $44 billion.
When Is a Home Equity Line of Credit (HELOC) Appropriate?
Home equity lines of credit can be an excellent substitute for certain homeowners, but like with any kind of debt, they must be handled responsibly and not by everyone.
According to Scott Terrio, manager of the consumer insolvency at Hoyes, Michalos & Associates, “a beneficial usage is as a savings cushion if they haven’t already lost much of their value in HELOCs.” According to Terrio, self-employed folks or making a lot of money through commissions can benefit from a HELOC if they can pay it off.
- When choosing to take on additional debt in the form of a HELOC, there are a few factors to think about:
- Can you comfortably afford the mortgage payment and other loan instalments, taking future interest rate hikes into account?
- Do you fully comprehend the conditions of your HELOC agreement?
- Are any loans with higher interest rates that you could consolidate using your HELOC?
- Will the HELOC help you stay out of serious financial trouble?
- Have you considered how you’ll repay your HELOC once you take out a large chunk of money?
- Are you using it for a decision that could have a variable result, such as stock market investing?
You should select “yes” for all questions except the last one. The HELOC can be an effective instrument for you to pay off higher rate debts or prevent a financial emergency, but you should utilise it carefully. Speaking with your lender about making regular payments on your HELOC is one approach to ensure discipline in your payback strategy. As an alternative, include lump sum payments in your regular budget to ensure that the debt burden is gradually reduced.
Can You Increase Your Home Equity Line of Credit (HELOC)?
You must ask the lender to change your current home equity loan or apply for a new home equity line of credit in order to access more of your home equity (HELOC). Until a specific period of time has gone since your most recent HELOC application, lenders typically won’t allow you to raise your credit limit.
Your property serves as the security for a HELOC, which offers you a revolving line of credit.
If you have a HELOC, you might question if a higher house value will immediately result in a larger line of credit. However, HELOCs don’t operate in this manner. You would need to change the conditions of your present HELOC in order to raise your line of credit. Because lenders are typically reluctant to grant you a greater line of credit immediately, you must ask for this.
However, a HELOC lender may automatically limit the amount of credit it lends to you if the value of your house declines. According to the Federal Trade Commission, lenders have the right to “freeze or limit your line of credit if the home’s value declines sufficiently below the appraised amount” (FTC).
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