Home Equity Lines of Credit (HELOC) for many years have been a way for Canadians to unlock equity in their homes and use the money for investing, paying for children’s education or quite simply lowering their monthly interest payments on high interest credit cards. This is all great if the property values remain steady, but if there has been a big upswing in value and the HELOC has been increased, here’s what can happen if the values start to reduce.
The bank can call a HELOC at any time meaning they can tell you that you have to pay it off which for most would mean refinancing the property and turning it all back into a mortgage.
The bank can freeze the HELOC meaning you can’t use it as they may see that your equity is no longer as large as it has been in the past.
And of course, they can raise the interest rate on the HELOC at any time, most Canadians enjoy the great rate of prime plus .50% or 1% on their HELOC but that can change at any time. The Banks can decide they want more and increase that percentage at any time, plus of course we are in a rising interest rate period and the bank of Canada will most likely increase prime at least three times in the next year. With prime currently at 3.70 per cent, your HELOC could easily be over 5% in the coming year.
A HELOC has to be used with some caution especially when using it for investing; a declining real estate market can easily wipe out any gains in equity and cause one or more of the above scenarios to occur.