Have a repayment plan if you use home equity line of credit: experts

OTTAWA A home equity line of credit may be a cheap and easy way to borrow money to pay off your lingering holiday bills or consolidate high-interest debt, but experts caution that you need a plan to repay the money.

They say it is all too easy to only make the minimum monthly payments to cover the interest and never make any progress on reducing the amount you owe.

“It is so easy to stay in debt for a long, long period of time,” says Scott Hannah, chief executive of the Credit Counselling Society.

Hannah says consolidating high-interest debt using a home equity line of credit that charges a lower rate of interest can be a good plan, but you need to understand how much you can afford to borrow, the interest rate you are going to be charged and how are you going to repay it.

Too often, he says, a HELOC is used by those who are spending more than they earn to cover daily expenses. “It can really mask spending behaviour, it can really mask the fact that a person may not be managing their financial affairs well,” Hannah says.

A HELOC is secured by the value of your home while the interest rate charged is normally linked to the big bank prime rates and fluctuates as that rate changes.

The Bank of Canada has raised its key interest rate target five times since the middle of 2017, moves that have driven up the cost of borrowing.