Having access to secured credit is a huge benefit to Canadians. The problem is, the media often sounds alarm bells concerning all types of credit – and frequently home equity lines of credit (HELOCs), in particular – roping it all into a giant debt cycle looming above all homeowners.
In fact, we’re certain you have heard homeowners who access their HELOCs being accused of using their homes as ATMs.
The issue that’s most often focused on is that, since HELOCs are fully open – meaning you can borrow the money again as soon as you pay a portion back – and you’re only obligated to make monthly interest payments, people who continually pile on debt and live beyond their means could potentially fall into a debt cycle struggle.
But, very few stories explain how, when used properly, HELOCs are a terrific tool to help homeowners build future wealth.
Secured versus unsecured credit
‘Secured’ credit means that the loan or credit is protected by your assets – such as your home. If you don’t stay up on your payments, the bank can use your home as collateral. As such, financial institutions consider secured credit to be significantly safer to lend than unsecured, which means you’ll be charged a much lower interest rate and typically be able to access more money if your credit or loan is secured.
Since secured lending products require collateral, the approval process can be longer than an unsecured loan as the collateral must be verified. This initial investment of your time, however, can prove worthwhile since you’ll benefit from lower interest rates and access to funds as you pay down your balance.
When HELOCs are your best choice
Large home renovations and debt consolidation are two popular examples where using a HELOC can prove very beneficial.
Unlike for smaller renovations, where you can put the supplies on your credit card and you’re often able to pay them off in full before any interest is charged, you may want to go through the process of obtaining a secured lending product when you’re looking at more extensive changes to your home.
Again, a secured line of credit gives you access to a larger credit limit with a lower interest rate that can be accessed on an ongoing basis for large projects.
If you have outstanding debt, a HELOC can help you consolidate that debt into one monthly payment at a lower interest rate, which should enable you to pay the debt down quicker.
HELOCs are also an easy way to access home equity for such things as investments (a down payment when purchasing additional properties or buying stocks), or as a business tool (purchasing inventory or making capital investments).
Do you have questions about which type of credit is best for you? Are you feeling burdened by debt? We’d be happy to help! Answers to your questions are just a call or email away.