May 12, 2017
Personal Investor: Canadians are shrewd with home equity lines of credit
By Dale Jackson
Our grandparents would be scratching their heads at the onslaught of lenders trying to get us to use our homes as ATMs.
The concept of tapping your home equity for cash was alien a generation ago. Now, it seems like an entitlement to use our home equity lines of credits, or HELOCs, to live the high life.
It’s not hard to see why so many lenders have gotten in on the HELOC game. The longer it takes you to pay off your mortgage, the more interest they generate.
But a recent report from Scotiabank suggests Canadian homeowners are surprisingly savvy with their HELOCs.
It found that of the $41 billion in home equity lines of credit in 2016, one-third went into home repairs and renovations. The return on investment on home renovations rarely break even, but it is an investment that partially stays in the home — adding further equity.
The report also found nearly a third of HELOCs were used to pay down high interest debt. Interest on a HELOC is usually prime plus one per cent, which is currently 3.7 per cent. That’s much lower than a typical rate on a credit card balance, which could be as high as 30 per cent. It’s important to note that HELOCs have variable rates and will likely increase as interest rates rise.
According to the report, 25 per cent of HELOCs were used to invest. Borrowing to invest can be risky, but borrowing to invest in your registered retirement savings plan (RRSP) and using the refund to pay off the debt is brilliant.
Ten per cent of HELOCs were used to pay for education – another investment of sorts.
The remaining 10 per cent came under the category of "other" — perhaps for emergencies — another good use for a HELOC.
If you’re thinking of opening a HELOC, there are restrictions. The limit on a home equity line of credit can be no more than 65 per cent of the home’s value. The mortgage balance and HELOC cannot be more than 80 per cent.
