By iA Private Wealth, June 13, 2022
What’s a HELOC?
How does it work?
What are the benefits and risks?
A HELOC offers a convenient way to access the equity in your home for renovations or as an emergency source of funds. And it can be a smart way to consolidate your other debts, particularly high-interest credit card debt.
When deciding whether a HELOC is right for you, a little common sense will go a long way. For instance, taking out a HELOC for big ticket expenditures like fancy cars or lavish vacations is clearly not a prudent decision. Likewise, using a HELOC for non-essential home renovations during a recession, when job security can be fragile, is also a bad call. As long as your income is sufficient and stable, and your purpose for the HELOC is sensible, the risk of falling into a debt trap is generally low.
While a HELOC’s interest rate is comparatively low, it can go up if the Bank of Canada raises rates, as it’s doing right now. And, like a mortgage, your lender expects you to make a minimum payment each month on the interest and principal you owe. So when you’re crunching the numbers and deciding if a HELOC is right for you, be sure that you’re not stretching your finances thin, as rapid rate hikes could make your monthly payments significantly higher than at the outset of the loan.
Be aware also that there are other costs associated with getting a HELOC, from home appraisal fees to legal and title search fees, among others.
Finally, before signing the dotted line, be sure to carefully read the HELOC’s terms, as they may include provisions you won’t be comfortable with. For example, in certain circumstances lenders can demand that you pay the full amount owing. And if you miss payments, your credit score can be affected and your lender may take possession of your home.This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.