It was a trend years ago for your mortgage to be put into a home equity line of credit (HELOC). This is where you had access to revolving equity in your home and could pay down as you chose.
Back then, HELOC interest rates were close to fixed rates, making it attractive to have an open line of credit without any penalties. As a credit tool that allows you to make interest-only payments, HELOCs are attractive for financing home improvements, post-second education, and other larger expenses.
However, most have fallen into the trap of making interest only payments and not paying down that debt. And this is where your HELOC can start to cost you.
What is a HELOC?
A home equity line of credit is a secured line of credit that uses your home as collateral.
A HELOC can have up to 65% of your equity as a revolving credit product, like a credit card. The additional 15% minimum as a fixed portion principal and interest payment like a standard mortgage.
Some HELOCs can be combined with this mortgage portion, called a readvanceable mortgage. As you pay down your mortgage, the amount of credit available in your HELOC will go up, since the equity in your home increases.
Most HELOCs tend to have variable interest rates for the line of credit portion that don’t require a fixed repayment schedule. At a minimum, you’re required to pay interest on the funds used.
Now, making your mortgage payment does not pay down your HELOC. It’s considered a separate credit product that you’re required to pay interest on each month. You can determine how much of the principal you want to pay back.
What is Your HELOC Costing You?
HELOCs generally have variable interest rates which are based on the Canadian benchmark rate (Prime). Most HELOCs are at a rate of Prime + 0.5%.
When interest rates go up, your monthly payment will go up, too. Currently, the Prime rate is at 6.7%, with most HELOCs starting at 7.20%. This rate is dependent on your overall balance, lender, and HELOC product.
Say you owe $300,000 on your home:
- HELOC at 7.2%: Interest only is $ 1,773.58/month
- 5-year Fixed closed 4.59%, 25 year amortization:
- $ 1,136.68 interest and $538.78 principle = $1,675.46 total monthly payment
That’s a difference of $636.90/month in interest!
How To Reduce Your HELOC Payment
If your HELOC payment is starting to pinch your wallet, we can look at a couple of options. We can maybe do a refinance, extend the amortization period of your mortgage, and include the HELOC into the new mortgage.
Of course, this depends on the balance of your current mortgage and HELOC, the lender you’re with, your home’s value and a few other factors.
The easiest place to start though is by reaching out to your lender and asking about getting a lower interest rate, even if it’s temporary. If you’d like help with how to have this conversation, send me an email and I can provide you with some tips (I can help with more than mortgages!)
If you’re tired of paying large interest payments and not making any headway on your HELOC, please reach out. We can put a strategy in place to get you in a better financial position.