Managing HELOC Debt
A lot of new mortgages are now re-advanceable. That means that when your mortgage is approved, you’re also approved for a home equity line of credit (HELOC). As you pay your mortgage down, it adds to the available credit of your HELOC. If you’re not disciplined about how you use your HELOC to meet your financial goals, you could end up never paying your home off.
The Bank’s Review also noted that by the end of 2022, 46% of new mortgages had an amortization period longer than the traditional 25 years. That is up 12% from 2019 which saw only 34% of new mortgages with an extended amortization period. Combine a re-advanceable mortgage with a 35-year amortization and you could have grandchildren before you’re close to being mortgage free.
The caveat. A longer amortization means your mortgage payments are lower, which can seem like a good deal. And it is – if you know how to use it to your advantage. The lower payments made qualifying for the mortgage easier and can free up some cash in your budget. Put this extra cash to work, before you unintentionally end up spending it. Pay off a routine bill that just seems to be lingering. Indulge in a small splurge or put the money towards holiday fun.
Caution This strategy works best with a realistic household budget. You don’t want to end up with ballooning, high-interest credit card balances that you pay off with your lower-interest HELOC. That just shifts your debt from Peter to Paul, but never truly pays it off. The lower interest on your HELOC can make it easier to pay off what you owe, so that part is good. But don’t jeopardize the equity you’ve built up in your home by using it to pay for things you can’t even remember buying by the time you get the credit card bill.
Dealing With Increasing HELOC Payments
Personal Loans Deserve a Shout-Out
The Bank of Canada further identified Indicators of financial vulnerabilities by credit type, and there’s a troubling trend emerging when they looked at aggregate data from one of the credit bureau companies. Installment loans – so just regular personal loans, e.g. for debt consolidation, are 90-days in arrears significantly more often than credit cards, car loans, unsecured lines of credit, mortgages, and HELOCs (in that order).
The fix? Your pay cheque can only stretch so far. When it’s reached its limit, something has to give. Most people do their best to keep up with their housing payment, either the rent or mortgage, and the credit accounts that keep the fridge full and protect how they get to and from work. Groceries and gas are typically paid for using a credit card, so then it’s only logical that the loan payment is what falls behind.
However, to protect your credit rating, you want to avoid late payments whenever possible. If you’re trying to juggle payments to see which to skip for another month, that’s a debt problems warning sign you shouldn’t ignore. Reach out to us before you can’t keep up with your housing expenses. Our credit counsellors are experts at figuring out options to help you get relief from your debts and create your own exit strategy.
What’s the Big Deal About Debt?
The big deal about the significant amounts of personal debt that so many Canadians are carrying is that according to the Bank’s Review, while households are still managing to get by, high debt loads and vulnerabilities exposed by options to manage higher payments (e.g. 30-year mortgages to bring payments down) will catch up to us.
The Bank went on to caution that the ability of highly indebted Canadians to manage through future turmoil, caused by a drop in income or a recession, could be intensified due to a built-up of vulnerabilities. This applies to variable rate loans and mortgages, as well as fixed rate mortgages, which are definitely not in the clear. As those mortgages mature over the next three or four years, a record number of households will need to spend significantly more of their income on mortgage payments.
What does this mean? High household spending with a reliance on credit will leave consumers exposed with a limited capacity to manage interest rate increases, ongoing inflation, effects on their budget from financial uncertainty, and fewer borrowing options if lenders are forced to tighten up their lending criteria to mitigate losses in light of an economic downturn.
The fix? Evaluate your financial situation and stop thinking that debt is normal. What’s old is new again when it comes to managing our money to get out of debt and then stay out of debt. Check out the viral trend of “cash stuffing” if you’re trying to find a way to budget better. Or stick with a simple tracking option to always stay on top of what you have to spend. Ditch your credit cards and only use your HELOC for planned or emergency expenses, like a home renovation or car repair bill.
Get Relief From High Living Costs and Avoid the Pitfalls of Debt
Interest rates are high, inflation is still rampant, and there’s not much short-term relief for the high cost of living in sight. Rather than banking on dealing with your debts when interest rates come down, seize the moment. Create a plan to take control of your spending and get back on track based on the rates you have now. By taking control and not using summer as an excuse to begin a ‘season of spending,’ you might just avoid a fall of frustration and regret.