Canadians taking on Home Equity Line of Credit Loans may be living on a slippery slope!
Many Canadians who are either looking for a source of cheap borrowing or, are struggling with debt, are allured by the lower interest rates of a Home Equity Line of Credit (HELOC).
Whether the reason is to fund a home renovation, a vacation or a way to consolidate debt, HELOC’s offer a lower interest rate than credit cards. So what is the catch? With a HELOC, you put your home on the table to secure your loan. Your home is now collateral, that can easily become “collateral damage” if you go become delinquent on your payments.
Still, HELOC’s are proving to be the fastest growing source of loans for Canadians. Most of us see HELOC’s as a typical loan, but the truth is HELOC’s can amount to a second mortgage. Yes, that much! Getting a HELOC effectively decreases the equity you have in your house and places a lien against the property, that’s why the home equity loans are also know as second mortgage.
Now consider the housing market and mortgage lending rates in the last couple of years. They have been, for the most part, quite low and many Canadians have taken advantage of these rates to buy homes that are above their budget bracket. Let’s say a family purchases a home that is beyond their financial means, but has been able to do so because of the low mortgage rate. The home’s purchase price home is $550,000. After that, they furnish and decorate their home, because, let’s face it; such a nice home demands it! Don’t forget, the family needs to pay for maintenance costs and property taxes. If the family is good at managing their money and earns a good income, they could be in fine shape. However, LIFE happens. What if one of the earners loses their job or can’t work due to illness? What if there is a marriage break down and a divorce results? All of these life events coupled with increased consumer costs could throw a wrench in their plan.
So let’s say one of the earners in our family loses their job. The debt they have accumulated over the years has bubbled up and they can no longer keep up with the credit card high interest rates. So they take on a HELOC to consolidate their debt. Since the family’s earnings have decreased and consumer costs keep increasing, they get into debt again. They cannot use their home’s equity as leverage now as they have already tapped into that. What if they lapse in their HELOC payments? Well, since their home is on the table as collateral, the bank that owns the HELOC can force them to sell their home to pay off their debt.
If the family chooses to sell their home, their HELOC must be paid off first. The money from the home sale that is left over, once the HELOC has been paid, may be considerably less than the family had anticipated. So until they sell, they are essentially trapped in their home.
Does a HELOC sound like a good solution to resolving debt? Consider the better alternative. Call OCCA Consumer Debt Relief to see how we can tailor a debt relief plan to get your debts paid off WITHOUT binding them to your home..
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