HELOC pros and cons | General financial discussion | Discussion forum

savemoresaveoften said

Not a fan of HELOC at all. One just end up owing and paying interest "forever", as your mortgage practically never ends. That to me defeat the purpose of own vs rent.  

If you use your house as an ATM, not a good idea. But if you are wise about it, like re-invest into higher returns, then you could qualify for tax write-offs.

It is all about how you use these things.

BUT the key part is that your assets are not locked in... you still have access.

smayer97 said

P.S. Fond or not, the best time to set up a HELOC is when you have a source of earned income. Once set up the bank is not likely to revoke it but it is harder to set up later in life. So at the very least look at it as insurance, just n case.  

I wasn't planning on this, but just wondering if there are fees for a HELOC if you never use it?

Loonie said
Yes, there are fees to set it up. I'd think twice about whether you really need it or will. It is a lien on your property as long as you have it in place, whether you are using it or not and there will be another legal fee to ultimately get rid of it. At least that's my understanding. When you buy your house, ask your lawyer about it; you probably won't have to pay any extra at that time to ask the question.  

I have NEVER had to pay anything to set up a HELOC unless you are doing it at a different time than when you set up the mortgage. The fees have to do with the appraisal of the property and related costs to do that. But at initial set-up pf a mortgage, that is already part of the process and cost.

And there are no ongoing fees to have one. The only cost to a HELOC is the interest you pay for any money withdrawn.

P.S. A HELOC is no more a lien on your property than the mortgage is. It is only the amount you withdraw/borrow against the property.

The only other consideration is that the HELOC credit limit shows up on your credit report, just like any credit card limit, which may impact your ability to borrow elsewhere. BUT that is a non-issue, as any money borrowed against your property is at your mortgage rate, which is most often the most favourable rate available, therefore, you simply just borrow from yourself when needed vs somewhere else, if no other credit is available.

Most people, when they buy their first house, don't have any equity to spare, so won't be eligible. Just as well.

For subsequent houses, if any, or if you are being gifted the money for a first house, I can't think of a good reason for doing it except as I said.
If you really do have a legitimate need for it, then the best time to get it is probably purchase time. Legal costs may be wrapped into the purchase and sale fees so you are less aware of them, but lawyers are going to be paid one way or another.

You have had some positive experience with HELOC and want to share your good news. Your strategy of timing when to take out the loan in order to avoid or minimize fees seems to be a good one IF one is determined to set this up.

However, I would still not recommend it without careful second thoughts. I would also not buy a house or sign any kind of mortgage (and a HELOC is basically a second mortgage) without consulting with a lawyer. I only ever had one mortgage, with a major bank, and the lawyer did find something in it that needed to be corrected - and was.

I don't know what you mean when you say you don't have to have more than the "minimum" equity to qualify. Most first time buyers struggle to meet the minimum for a down payment from what I hear and would surely not be qualified to borrow against that, nor should they. This may be easier for those who are moving up, but many of them too are strapped, trying to look like they are better off than they are.

I agree that only people with a proven record of competence with money should even consider such an arrangement, but, at the same time, we need to look at what the loans are for. Even a "home improvement" loan can fall flat on its face if the market falls at the wrong time. I read an autobiographical comment in a book
by behavioural economist Dan Ariely recently where he talked about how he and his wife had bought a nice house when he taught at MIT and spent tons of time and money renovating, removing walls, making it more open to light, installing new large windows etc., but when they came to sell it, it sat on the market a long time without bids until a realtor told them to put the walls back in and make it darker again. Some fantasies are better than others.

It may indeed be useful for seniors, but then it is not unusual for those seniors to become less competent with their money and can't keep up. One elderly relative in this family was spending about 600/month on the Home Shopping Channel on cosmetics with an income that couldn't support it. That's no problem if you can draw from your HELOC. But, then, it turns out you need the money in that home for your are in your final years and it's not all there any more. Another relative wiped out the entire value of her very nice home this way without even using a HELOC and had to be supported by her children in her final months. If she'd had a HELOC, the burden would have been greater on those children because of the high rate of interest.

My point is that you are making it sound much simpler and less risky than it often is. In order to not pay any fees, according to your scheme, one must choose very specific times and conditions in order to set this up - when buying a property, likely not the first one (not everyone buys a second house); when "refinancing" (not everyone does this either, and some do it because they were already in financial trouble); your credit rating can afford the hit which will basically be in place forever and so on. And on top of that one does need to have a really good reason for borrowing against one's home which is different from the usual reasons for which people take on debt.

I agree with smayer97 “If you are not good with credit, do not do it. Period.” I had my HELOC set up with TD 18 years ago when I purchased a condo unit under new condo development. The rate is Prime + 1% (3.70% as of today). I don’t have to pay any fee ever unless I get money out from HELOC (i.e., will pay interest for the fund withdraw). I had been withdrawn from it more than 20 times since. I always deposit it back within a week. I treat HELOC as a bridge loan (interest rate for bridge loan is much more expensive). If I want to discharge HELOC in the future, I will have to pay about $350 according to TD couple years ago.

It's not only the interest rate that's variable for a HELOC. The lender can also vary borrowing limit and term.

One should review the fine print of the HELOC one has. Most of them are not committed financing, like regular mortgages and reverse mortgages are.

Legally, lender cannot ask a regular mortgage borrower to repay before end of the current term. Lender cannot ask reverse mortgage borrower for payment while the borrower is still living in the place and has not sold.

Lender can demand a HELOC borrower repay balance in full anytime or convert balance to a regular mortgage.

It is a simple matter for the HELOC lender to send the employer a letter requesting confirmation of employment and salary to see if the borrower is still employed and not retired or laid off.

It is actually not that unfair for a lender to cancel a HELOC when the risk of default jumps later.

Houses are secure collateral only when foreclosures are far in between. That's an important lesson from 2008.

House prices in Toronto likely won't crater should a medium size business fail and a few of their employees end up losing their homes.

That's not going to be the case when a town's marshmallow factory closes and that factory was providing 50% of the town's jobs!

COAST CAPITAL and HELOC topics:

COAST CAPITAL: I have a TFSA maturing on the 1st at Coast Capital. Calling them does not get me any offers of even a half-decent rate. I may leave them, but like that I am grandfathered with free mailed monthly statements, so I may keep a token amount and watch for promotions.

They USED to be a BC credit union but converted to a federal one a few years ago. (When we got the 4% GIC promotion!) The deal provided an unlimited credit union insurance guarantee for all existing term deposits until their expiry. All new deposits went to CDIC limits.

HELOCs: It's true that anyone who handles credit poorly can wreck themselves with them. But if those people are carrying credit card debt, the HELOC rate will be half or less!

I haven't seen anyone having to pay fees to set up or maintain a HELOC.

A HELOC can give people with irregular income, or who expect a lump sum from a lawsuit or inheritance, flexibility to pay their mortgage earlier (in part or all) without penalty. Split the home purchase between mortgage and HELOC and then you can put more money into paying off the HELOC than you can in most mortgage pre-pay options (10K per year, once per year, etc.). In some instances, there's a higher HELOC rate than on the main mortgage (often when they're variable, or one is) so it's better to pay extra into the HELOC than into a mortgage additional payment.

I helped a friend who handles money poorly by having him arrange to pay his credit card from his HELOC automatically; he was a chronic late-payer and interest-penalty-sufferer. I put him on a schedule and he stopped drinking in bars and restaurants, and had his paycheques go straight into the HELOC, saving him interest even if the cash went out when his credit card bill came due.

This benefited him greatly until he completely paid off his credit cards and HELOC . With no credit card balance, he would pay no interest on the card but would pay a small amount on the cash going to his credit card if it sat there. In the end, he was still late with payments and went back on the auto-deposit-auto-pay regime.
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