Here’s how rising rates are affecting your HELOC

If you have a home equity line of credit (HELOC), or you’re considering getting one, you should be aware of how rising interest rates will impact your borrowing and repayment abilities. There’s been a lot of focus on increases in mortgage payments, but it’s important to discuss the effects rate hikes are having on other forms of debt and borrowing. Here, we’re going to talk about how interest rates are so closely related to your HELOC payments, and what the deal is with “interest-only” HELOCs.

How rising rates impact HELOCs

HELOCs are revolving lines of credit that home owners can use for things like renovations, investments, or other payments. Your home equity is what secures your HELOC. Your HELOC allows you to borrow up to a certain amount of money, which you then pay back with interest. The fact that it’s revolving means you can repeatedly borrow and repay money with your lender. 

Of course, we know interest rates are on the rise in Canada. Since HELOCs usually have variable rates, this means their interest rates are increasing too. In short, it’s costing more to repay your HELOC loans now that rates are rising.

“Interest-only” HELOCs

The idea behind an interest-only HELOC is pretty much as it sounds. Borrowers will only pay the interest, and not the principal amount, for a certain amount of time. This makes borrowing more affordable in the short term. However, it also means borrowers will owe a lot more money long-term, which they might struggle to repay. Borrowers with lower credit scores, or who have concerns about repaying, should generally avoid this option. 

Plus, it’s important to remember how much rates are rising. This means borrowers with an interest-only plan are collecting tons of extra debt on top of the principal balance they owe. The higher your principal balance is, the more rate hikes will affect your future payments.

Is it time to start paying more?

Your HELOC doesn’t have to be forever debt. It may be a good time to consider paying more than just the interest on your HELOC and start working towards paying down your principal. The fact is, as rates keep rising, so will the amount you pay in interest. This is a good opportunity to start thinking about your repayment plan. Eventually, you will have to pay back the principal amount, but the question is what interest rates you will see on those payments.

Interest rates may still rise, and are unlikely to fall again for a little while yet. With that in mind, starting to pay down your debt now may be a good idea. The lower your principal, of course, the less you will owe in interest. While this is a time where many Canadians are trying to tighten their budgets, paying off your HELOC is a good use of your finances if you can afford it. It can save you money in the long run, and will likely rescue you from owing more than you can afford in interest later.

HELOCs are complex, and every borrower’s situation is unique. The one thing that all borrowers have in common is that rising interest rates will affect their payments. Now, you have to decide if you think it’s a good time to start paying down your principal, or if you should stick it out with interest-only payments for now. If you’re unsure what your best move is, contact a broker! We can give you in-depth guidance, and help you understand the best way forward.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.