Understanding HELOCs and When It’s The Right Time To Use One

Home equity lines of credit (HELOCs) are a popular way for Canadian homeowners to access borrowed funds. And it’s easy to see why: HELOCs typically come with lower interest rates than credit cards or personal loans and offer the flexibility to use the money for just about anything. 

But what exactly is a HELOC, and how can you use it wisely? I’ll break it down further to help you figure out if it’s the perfect loan option for you.

What, Exactly, Is a HELOC?

A HELOC is a revolving line of credit secured by your home’s equity. Your home equity is calculated by subtracting what you owe on your mortgage from your home’s market value. For example, if your home is worth $500,000 and you owe $400,000, your equity is $100,000. Most lenders allow you to borrow up to 65% of your home’s equity, and in some cases, up to 80%.

HELOCs work like a credit card – you can borrow as needed, up to your limit, and repay the balance over time. However, because it’s secured by your home, failure to make payments could lead to foreclosure. This makes it essential to use a HELOC responsibly and consult a financial advisor before you make this big step.

Weighing the Pros and Cons

HELOCs are a popular way of borrowing money – according to the Canada Mortgage and Housing Corporation’s 2024 data (data 21), HELOCs are the second-largest contributor to household debt in Canada (8.65%). They’re popular for several reasons but they also have their downsides. 

Pros:

• Access to a Large Amount of Money: A HELOC lets you borrow a large amount of money by using your home equity as collateral which makes it a great option if you need more funds than a credit card or personal loan can provide.
• Flexible Spending: You can use your HELOC for almost anything and at different times. Whether it's a home renovation now or a big expense years later, a HELOC can handle multiple needs if managed wisely.
• Possible Tax Breaks: If you use your HELOC for certain business or property investments, you might get a tax deduction on the interest. 
• Lower Interest Rates: HELOCs usually have lower interest rates compared to credit cards and personal loans. 

Cons:

• You Could Lose Your Home: Since a HELOC uses your home as security, missing payments could lead to foreclosure. It’s important to borrow only what you can afford to repay.
• Interest Rates Can Change: Most HELOCs have variable interest rates, which means your payments could go up if rates increase. 
• Setup Costs: Getting a HELOC isn’t free. You might have to pay for things like closing costs, legal fees, and an appraisal. Plan to spend up to 5% of the loan amount on these costs.
• Your Credit Score Will Be Affected: Like any debt, a HELOC can impact your credit score. If your score is low, it might limit how much you can borrow or result in higher interest rates. 

Why It’s Wise To Work With a Mortgage Broker

Navigating HELOCs can be tricky, especially with fluctuating interest rates and borrowing limits. A mortgage broker can help you understand your options, find the best rates, and ensure that a HELOC aligns with your financial goals. They’ll guide you through the fine print, so you know exactly what you’re signing up for.

Smart Ways to Use a HELOC

Home Renovations

Renovations can be expensive, but they’re a common reason people turn to HELOCs. Using a HELOC to fund projects like a kitchen remodel or finishing a basement can increase your home’s value. With a lower interest rate than most other loans, a HELOC can make financing these upgrades more affordable.

Debt Consolidation

If you’re juggling high-interest credit card debt or unsecured loans, a HELOC can help consolidate those into a single, lower-interest payment. By transferring multiple debts into one monthly payment, you can save money on interest and simplify your finances, however, it’s essential to avoid accumulating more debt once you’ve paid off the original balances.

What to Avoid Using a HELOC For

Non-Essential Purchases

While a HELOC can feel like a financial safety net, it’s not free money. Avoid using it for things like vacations or luxury items. Borrowing for non-essentials can lead to financial trouble down the road if you’re unable to make repayments.

Paying for Education

It might be tempting to use a HELOC to fund tuition, but it’s not the best option. Since your home is collateral, missed payments could put it at risk. Student loans, particularly with the federal government’s removal of interest charges, are usually a safer and more predictable choice.

Alternatives to HELOCs

Second Mortgage

A second mortgage provides a lump sum rather than a revolving line of credit. You can borrow up to 80% of your home’s value (minus your first mortgage) and repay it through fixed monthly payments. While this can be useful for specific needs, it’s less flexible than a HELOC.

Other Home Equity Loans

You could also refinance your mortgage or opt for a blended-rate home equity loan. These options typically adjust your current mortgage terms and require careful planning to ensure they’re cost-effective. A mortgage broker can help you determine which approach is best.

Key Tips for Using a HELOC Responsibly

• Only Borrow What You Need: Just because you can borrow up to 80% of your home’s equity doesn’t mean you should. Carefully evaluate how much you need and ensure you can repay it comfortably.
• Work With a Mortgage Broker: A broker can help you find tailored solutions, ensuring you’re not overextending yourself financially.
• Seek Help if Needed: If you’re struggling to manage debt, consider speaking with a financial advisor to explore your options.

Are You Thinking That A HELOC Is The Best Idea For You? Call Me And We Can Find The Perfect Solution

HELOCs are a powerful financial tool when used wisely. By working with me and borrowing strategically, you can leverage your home’s equity to achieve your goals while keeping your financial health intact. As a financial advisor, I can look at your long-term goals and be sure that a HELOC is the right option for you.

Book a free consultation or give me a call at 705-315-0516 today and let’s find the perfect home equity solution for you.