Should you amortize the full amount of your HELOC?

As the Bank of Canada continues with their trend of increasing interest rates, we have heard a lot about its impacts on mortgages. On a slightly different note, how does it affect people with home equity lines of credit (HELOC)? Since most HELOCs have variable rates, and many have an interest-only payment plan, this is leaving many Canadians with higher amounts to pay. Is it time to consider an amortization to start the repayment process on your HELOC? Here’s what you need to know.

Reminder: Rising rates impact your HELOC

Your HELOC is a revolving line of credit, secured by the equity in your home. You may be using your HELOC for a number of reasons, as your home equity may be helping to fund a renovation or make other payments. The important thing to remember is your HELOC likely has a variable interest rate. When rates rise, so will the interest you must pay when you’re making payments to your lender. Over the past year, this means the interest on HELOCs has gone way up.

Another important thing to remember here is many HELOCs are set up with interest-only payments. This means borrowers only pay lenders the interest on their line of credit for a set period of time, allowing them to borrow more often and more easily. However, this comes with some drawbacks, especially in today’s climate.

The problem with interest-only payments today

Interest-only HELOCs can be dangerous at the best of times. The fact that borrowers are putting off paying the principal amount of their loan may be helpful in the short term. Unfortunately, this results in borrowers owing a lot of money down the line, which many might find tricky to repay. Add in today’s interest rates, and this exacerbates the problem further. Interest-only borrowers are racking up a lot of debt by paying higher interest on their HELOC. The higher your principal amount, the more in interest you are paying. 

While borrowers don’t have control over interest rates, they do control their repayment plan. It might be time to consider an amortization to begin the repayment process. 

Is it time to contact a broker?

Amortizing the full amount of your HELOC means starting to pay back not only the interest you owe, but the actual principal balance as well. If interest rates continue to rise, the amount you owe in interest will increase too. This cycle can easily trap borrowers and put them into financial trouble if they can’t pay back what they owe down the road. The more money you have to pay back now, the more in interest you will owe. However, by reducing your principal, your interest payments will of course lower too. This means if rates rise again, your principal will be lower and your interest payments will not be as painful. 

We understand this is a time where many Canadians are trying to reduce their spending. However, borrowers who have the funds to start paying off their HELOC may find this is a good time to do so. It will likely save them money in the future, and prevent a buildup of excessive debt. You should contact a broker to discuss your options, and whether an amortization is the right decision for you. We can help you determine how much money you could save, and how to begin the repayment process. 

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.