Getting a mortgage? It pays to know before you owe

April 20, 2018

By Lucie Tedesco, Commissioner, Financial Consumer Agency of Canada  

Are you getting into the housing market this spring? Or are you one of the 47% of homeowners whose mortgage is up for renewal by November 2018, according to the Bank of Canada?

Whether you’re a first-time homebuyer, considering moving, or your mortgage is coming up for renewal, there’s a lot to think about. Interest rates have increased since last summer, after remaining quite low for 7 years. And mortgages have changed—becoming more complex in recent years. 

If you’ve saved up a down payment of at least 20 percent, or if you have paid down 20% of your home’s value, most lenders will offer you a readvanceable mortgage—a term mortgage combined with a home equity line of credit (HELOC). You can check out this video to better understand how this complex product works

If used prudently, a HELOC can help you reach your long-term financial goals. Some financial institutions bundle other financial products, like car loans or credit cards, together under a readvanceable mortgage, typically at an attractive interest rate. With flexible repayment terms and a credit limit that may increase automatically as you pay down your term mortgage, a HELOC can be part of an effective strategy to pay off other, higher-interest debt. But before signing on the dotted line, be aware of the fees that may apply, and the risks of tying different credit products together. 

For instance, to switch lenders the next time your mortgage is up for renewal, you may first need to repay all credit products under your readvanceable mortgage. There are also additional legal fees you wouldn’t incur if you were moving a traditional mortgage.

Something else to consider: while HELOCs offer relatively low interest rates, they are variable. As a country, we are experiencing record-levels of household debt. But did you know that HELOCs represent a significantly larger portion of household debt than credit cards? If you’re already living paycheque to paycheque, even a small increase in your HELOC interest rate could make it tough to make your payments. 

What is your long-term plan? Do you intend to use your home’s equity to fund your retirement? How long do you plan on staying in your home? How will you use your HELOC—for renovations, to invest, to consolidate higher interest debt, for emergencies, for a second home, for a vacation? How would interest rate increases, job loss, or illness impact your ability to repay your debt? 

Ask yourself: Would a HELOC tempt you to use your home like an ATM? 

If you choose to get a HELOC, here are some tips to lower your risk of finding yourself in over your head:

Establish a repayment plan. You can set a portion of your HELOC in a sub-account with a fixed term repayment schedule so you pay more than just the monthly interest. With a HELOC, there is usually no penalty to pay back as much as you can at any time.

Establish a plan for how you will use a HELOC. For example, make a realistic budget for any home renovation projects you intend to pay for with your HELOC.

Negotiate a lower credit limit. Lenders may approve you for a higher limit than you need. If this would tempt you to overspend, consider negotiating a lower credit limit that does not increase as you pay down your mortgage.

Create an emergency savings fund. This way, you’re less likely to use your HELOC for an unexpected circumstance like losing your job. Avoid getting into a debt spiral where you need to use your HELOC to cover your monthly bills for an extended period of time. 

Learn more about HELOCs and find useful financial planning tools at canada.ca/it-pays-to-know, and join the conversation on Twitter and Facebook.

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