Help fund your next renovation with a low-cost HELOC and refresh your home’s look

Dreaming about that kitchen island? Dying to blow out your attic and create a master bedroom? The time to act could be now. Over the last few years, interest rates have fallen and home prices have soared. When you combine these factors, getting a home equity line of credit (HELOC) for renovations could make sense. You’d have access to the equity in your home, and the interest rate you’ll pay can be quite low.

As for what you can use the money for, a HELOC allows you to use the funds for any project you desire. That said, the last thing you want is to treat your home like an ATM. Knowing the answers to these three questions about HELOCs before you start knocking down walls can help you make smart financial decisions.

1. How do HELOCs work?

HELOCs are a type of loan where the equity in your home acts as security. Equity is the purchase price or current market value of your home, minus any outstanding mortgages. In Canada, the limit of your HELOC is 65% of your home’s purchase price or market value. The good news is your HELOC limit goes up as you pay down the principal balance or if your property value increases.

Let’s say your home is currently valued at $500,000, your HELOC limit would be $325,000. Suppose the remaining balance on your mortgage is $200,000. Then your HELOC limit would be $125,000. (Keep in mind that this example is for illustration purposes only as financial institutions may use different calculations for lending.)

Once approved for a HELOC, you can use as much or as little as you want. The money can be accessed at any time, which is handy for any upcoming projects.

2. When should you use a HELOC?

Technically speaking you can use your HELOC for anything you want, including vacations, a home down payment, an emergency fund and more. But using a HELOC for what it’s intended—home improvement—can be a good idea. The funds are flexible and easy to repay. And you are building even more equity in your home with those funds.

“The interest rate is lower than an unsecured line of credit or credit card because the debt is secured by your home’s equity,” says Jason Heath, a Certified Financial Planner at Objective Financial Partners Inc. “Unlike a mortgage that has principal and interest payments, home equity lines of credit generally require interest-only payments, so the carrying costs can be lower.

HELOC interest rates are slightly higher than the Bank of Canada’s prime rate, which is why they’re so attractive. Compare that to a personal line of credit that typically has an interest rate of 5%-7% or credit cards that start at 19.99%, and it’s easy to see the savings.

3. What are some HELOC best practices?

While HELOCs can be a great tool to help you fund your home renovation projects, they can also put you in a vicious cycle of debt if not used properly.

“Just like a credit card, a home equity line of credit can be a tempting way to spend beyond your means,” says Heath. “Continuously borrowing could mean your overall debt level never decreases despite paying down your mortgage.”

Payments might be easy to handle at first, but interest rates will go up eventually. When this happens, homeowners who have gotten used to low rates may not be prepared for the increased monthly costs. So make sure you have a strong budget in place ahead of time for these variables. As previously noted, HELOC payments are usually interest-only. So, if you haven’t been paying down your principal, you might run into a cash crunch.

Lastly, pay attention to the terms of your HELOC so you’re not hit with any surprises. Interest rates can increase, limits can drop, and your loan could even be recalled where the full remaining balance needs to be repaid immediately.

Putting home upgrades within reach

Like any credit product, a home equity line of credit should be approached with care. In the right circumstances, a HELOC can be a great tool to help you reach your goals. Another tip for getting the most out of your lending is to avoid the urge to go for the most expensive upgrades. Instead, find creative ideas for renovating on a budget to really stretch your equity dollars.

Speak to a Coast Capital advisor to find out if a HELOC makes sense for your situation.