Rockies residents looking to tap into their home’s equity can do so for a bargain today, as ATB introduced a promotion first-year 3% home equity line of credit - the same level as Prime! The ATB HELOC is available in Alberta until May 31, and applies to the first full year of the loan - the lowest HELOC rate in Canada!
Paying only Prime for a HELOC is sure to be a welcome break for homeowners, who saw their HELOC options slashed by the very same CMHC mortgage rule changes that capped amortization and mortgage affordability. As of last July, owners can withdraw only up to a max of 65% of their homes value, and up to 80% of their loan to value ratio.
Keep in mind, however, that HELOC rates are variable, meaning once this first-year promo rate is up, your HELOC’s interest will adjust to whatever market conditions will be in the future.
Why Take Out a HELOC?
Mortgages really are investments that keep on giving! Not only do you own the roof over your head, but all payments made toward your mortgage over time build up equity, which can be tapped into for additional funds. HELOCs essentially re-borrow money you have already paid into your mortgage - You can take up to 80% of the money you’ve paid so far over your amortization and up to 65% of your home’s total value.
This money can be used for anything - an emergency fund, home renovations, even to take a vacation. Similar to credit card debt, a HELOC is charged interest, and revolves over time - there’s no amortization or deadline to pay it off.
The Risks of Revolving Debt
It’s due to these unrestrictive features that HELOCs were capped in the first place - they’re considered a higher risk product, both to the borrower and lender. Those who take on too much debt can find themselves owing more on their mortgage than their home is worth - especially if home values go south. As well, HELOC interest is based on variable conditions - should the Bank of Canada raise the overnight lending rate, so too will your HELOC payments. At present time, interest rates are at record lows - and they’ve stayed that way since September 2010.
Economists aren’t predicting a rate increase until early 2014, due to slower than expected Canadian economic growth - but it’s important to be aware of how your payments may change, and whether your line of credit will still be affordable.
If you do default on your HELOC, your bank is on the hook for the slack - another reason why recent measures have been taken to limit their accessibility.
Here are a few tips to keep in mind if you’re considering a HELOC:
- Don’t be greedy. Remember, the more you borrow, the more you’ll pay back with interest. Take only what you need, even if your bank qualifies you for a larger loan.
- Make a payback plan. As soon as you’ve withdrawn your loan, make a payment plan with your lender for at least a few hundred dollars a month.
- Because HELOC rates are often higher than mortgage rates, pay your HELOC payments before making extra payments on your conventional mortgage.
- Be sure to factor your interest payments into your monthly budget, and have a plan to adapt in case national interest rates go up.