Thinking of Getting A HELOC To Get You Through The Current Crisis? Read This Before You Make That Application

There is a global pandemic that is affecting the whole world, and millions of Canadians are at risk of going without pay for a prolonged period of time. Notwithstanding help from the government, if you are fortunate enough to own a home, you have the option of borrowing on a HELOC – Home Equity Line of Credit.

To qualify for a HELOC you must be a qualified homeowner and have at least 20% equity in your home.

Features of a HELOC:

• Low interest rates – much lower than credit cards.
• Flexible payments – you can repay what you owe at any time without penalty.
• Very high credit limit – you can borrow up top 65% of your property value.

Drawbacks you must be aware of:

• Because payments are so flexible, borrowers have a tendency to borrow more than they need and take longer to repay the money.
• The variable interest rates that are typically associated with a HELOC, can move up or down depending on how the economy fares, and the discretion of the lender. This can have a great impact on your debt repayment. If for example, if the rate increases from 4% to 5%, you would have to pay a whopping 25% more in interest payments.
• Financial institutions can ask you to pay down your HELOC at any time, or lower your credit limit, at their discretion.
• Real estate prices can go down and you could end up with the value of your home being less than your mortgage and your HELOC combined.
• You could also lose your job or suffer a reduction in your monthly income, leaving you not enough cash flow to even pay the interest portion of your HELOC.

Given that the current interest rates are at historically low levels, a HELOC would be the most prudent way to obtain funds to bridge your income gaps. But if you use one, make sure you have a realistic payment plan in place, and understand your HELOC contract before you sign.

An experienced real estate agent can help you navigate the search for your next home.  Be sure to have some backup options ready in case your home sells quickly and you can’t find a new place you love right away. Contact us if you have any questions.