Managing a HELOC – Dealing With Interest and Payments

Although a lot of Canadians are interested in getting a HELOC or a home equity line of credit, the majority are concerned about being unable to manage making payments on time more so as interest rates seem to be seeing an upward trend these days. News saying that HELOC payments will increase also abound, causing fear and worry for those who are already struggling financially.

The Current Situation

More than 2 million Canadians Have an existing HELOC or are on the process of getting one. They’re due to see an increase in their payments in the coming months, news that are not welcome for many.

A HELOC is a revolving loan that is secured by a home’ equity. This means that failure to make payments can place one in the danger of becoming homeless. This, of course, sounds dramatic; however, this won’t be an issue for a properly managed HELOC.

Advantages of a HELOC

A home equity line of credit allows a homeowner to tap home equity whether or not they have mortgage. In getting a HELOC in Canada, what matters is that the homeowner has built up some equity on the home and that the homeowner qualifies for the criteria set by the lender.

HELOCs are a lot more flexible than a second mortgage and works almost like a credit card but with markedly lower interest rates. With a HELOC, a homeowner can access a part of or the full amount of a predetermined loan ceiling when needed. Interest is only paid on the exact borrowed amount (for most HELOCs) and there is no penalty if the homeowner decided not to use the HELOC at all. Payments are not expected until the agreed upon payment period, giving homeowners ample time to prepare themselves financially  to afford making payments.

About Interest Rates

Now, HELOC interest rates are lower than that of a credit card; however, they are variable just like the interest for a credit card and the rate is set by the lender. This means that when interest rates go up, HELOC payments would also go up.

The prime rate jumped up 0.75% a few weeks ago. What was formerly 0.50% is now 1.25%. This may seem like a huge increase and yes, it is, but considering that credit cards charge upwards of 20%, the increase in HELOC rates is certainly a lot more manageable although still considerable. More increases are due by the end of 2018 and until 2019.

Coping with Changes

Because of the forecasted rate increases, it may be wiser to choose to convert your HELOC into a fixed rate mortgage This will incur charges so this option is best for those who still have a lot to pay on their HELOCs. For those who have a little left to pay, it would be smart to make sure that payments are made on time to minimize the possibility of getting a huge rate increase from your lender as lenders typically assign a higher rate for those who also have an increased risk of non-payment.

Getting a HELOC is huge and important decision that is best made when you’ve had enough time and consideration to not make blindly. Questions about getting a HELOC or how to leverage your home equity should be answered before you sign any papers. If you have any questions do not hesitate to contact us at Mortgage Central. We’d be glad to assist you with managing a HELOC and getting it.