To use your HELOC wisely, you need to stick to a plan to pay it off fully, and avoid continually borrowing against your home equity.
Learn more at canada.ca/money
(Words “Is a Home Equity Line of Credit right for you?” appear on screen)
If you're like millions of other Canadians, you're busy paying down your mortgage.
(Animated hand draws a cartoon home and couple)
It will take 25 years or so... but it can be a great way to accumulate personal wealth especially if house prices rise.
(Animated hand draws woman inserting a gold coin into roof)
But mortgages have changed. And it's important to understand just how if you want to fully benefit from your home's potential to build your personal wealth.
The first thing to understand, is something called "equity".
(Animated hand draws house outline. Words “250k Mortgage appear on screen”)
That's the difference between what you owe on the house and the value of the house.
(Animated hand colors in house outline. Words “50k”, “200k”, “Equity: You Own,” and “Debt: You Owe” appear on screen)
Your equity can increase in two ways. As you pay off your mortgage,
(Colour fades from house as 200k turns to 0)
and if the value of your house rises.
("250k" appears on screen. Animated hand crosses out "250k" and writes "270k". Words “Value of Home Increased” and “You own the Full Equity” appear on screen.)
Today, to finance your house
most banks will offer you a readvanceable mortgage if you have a down payment, or equity of 20% or more
(Animated hand draws house outline with gold coins on roof. Words “equity”, “Readvanceable mortgage,” and “You own” appear on screen)
It combines a traditional mortgage with a home equity line of credit. There's a big difference between these two forms of debt.
(Animated hand divides house in two and colours mortgage side blue and HELOC side red.)
Your mortgage debt only goes one way... down, down, down because you must make regular payments against both the interest and the principal borrowed. You pay down the mortgage principal on the one hand, your equity grows.
(Colour fades from mortgage side. White space fills with gold coins.)
But, you can borrow against that equity with the other hand... using the home equity line of credit, or HELOC. that is part of your readvanceable mortgage.
(Gold coins fade and are replaced with HELOC colour.)
Unlike your mortgage,
you only have to make regular payments against the interest owing on your HELOC.
(Animated hand draws bar graph. Words “Mortgage principle”, “HELOC principle”, and “Year 1” appear on screen)
Without paying down the principal, until you sell your home.
(Animated hand draws more bar graphs for Year 10, Year 20, and Year 25. Mortgage bar decreases)
This short-term credit advantage can mean a long-term debt problem.
(Words “Mortgage paid off” appear on screen. HELOC bar remains full)
For some folks,
a HELOC can be a good way to pay off other, higher-interest debt or home renovations.
(Word “HELOC” appears on screen. ANIMATED HAND draws circles depicting bills and tools)
But ask yourself,
Would a HELOC tempt you to use your home like an ATM?
(Animated hand draws a home with ATM on the side. Man takes cash from ATM)
Mounting HELOC debt could put you at risk if you lose your job, get sick or injured, interest rates go up, or, if your home decreases in value.
(Couple reappears next to house. Thought bubbles show first aid symbol, upward trending arrow, and house with arrow pointing down.)
If you continually borrow against your home's equity, you might end up owing more than your home is worth, lose your home, or have to sell it to pay down your debt.
(Thought bubbles disappear. Animated hand draws for sale sign next to house.)
To use your HELOC wisely,
you'll need to stick to a plan to pay it off fully, and avoid continually borrowing against your home equity.
(Animated hand draws a budget. Words “Household Budget”, “1. Mortgage Payment”, “2. HELOC Payment”, and “3. Savings” appear on screen)
Don't use your house as an ATM.
Take charge of your finances.
(Animated hand draws smiling couple sitting at table with a budget and calculator.)
Learn more at canada.ca/money
(Animated hand draws words Canada.ca/money)
(Screen fades to Government of Canada logo)
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