Personal Finance

Any downside to a HELOC?

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Deal Fanatic
Dec 5, 2009
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Any downside to a HELOC?

In applying for a mortgage I'm wondering whether or not to also add a HELOC, as a "just in case" fund. If we ever need the money or do renos down the road it would be good to have.

That said there is nothing specific we need the money for now, and may never need it. But we thought we are in a better negotiating position I rates if we bundle it with out mortgage.

Is there any downside to getting the HELOC now if we may never need it? Should we just wait and apply for it later if/when we need it? Does it matter if out mortgage is a collateral mortgage or not? Does it matter what the amount is - We were told don't bother with $25k may as well up it to $100k.

Thanks
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May 28, 2012
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Saskatoon
We waited until our mortgage was completely paid off before opening a HELOC. The banker suggested doing this rather than discharging the mortgage - saved us the fee at the time and also added a bit of security, I guess. Anyway, it's nice to have the money available for emergencies but we've only ever tapped into it twice and paid it off within a month or two. I am debt-adverse though, so maybe not typical of most people.
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Dec 14, 2010
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fdl wrote: In applying for a mortgage I'm wondering whether or not to also add a HELOC, as a "just in case" fund. If we ever need the money or do renos down the road it would be good to have.

That said there is nothing specific we need the money for now, and may never need it. But we thought we are in a better negotiating position I rates if we bundle it with out mortgage.

Is there any downside to getting the HELOC now if we may never need it? Should we just wait and apply for it later if/when we need it? Does it matter if out mortgage is a collateral mortgage or not? Does it matter what the amount is - We were told don't bother with $25k may as well up it to $100k.

Thanks
I personally use my HELOC to invest. I see no downside as long as you're comfortable with leveraging and know how to invest.

Smith Maneuver pays off your house faster. Great way to build a decent nest egg too.

Rod
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Mar 23, 2009
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If getting the HELOC now means avoiding some of the fees, it can make sense to get it now esp. if they're offering a reasonable rate AND you know you will not use the HELOC irresponsibly.

As for the Smith Maneuver, I think that's a great way to get yourself in trouble financially.
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Dec 14, 2010
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EugW wrote: As for the Smith Maneuver, I think that's a great way to get yourself in trouble financially.
Care to elaborate why?

I specifically said "provided one is comfortable with leveraging and know how to invest".

Not every debt is a bad debt. A debt that you can profit from and cost you nothing (interest can be paid by dividends and are tax deductible) is a good debt and wealth builder. Not for everyone, but that's different than great way to get yourself into trouble financially.

Inability to invest is not a SM problem. SM is just a leveraging tool.

Rod
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Ultimately, rodbarc, I agree with you.

However, the SM encourages very extensive leveraging, which is why people can run into problems, esp. when they might not be as disciplined as you may be. Also, technically they can call in the debt any time they want theoretically, although I haven't heard of that happening to any significant extent in recent times. Also, the legality of the Smith Maneuver in CRAs eyes still remains somewhat murky. One argument that's made is that if you're writing off 100% of your mortgage interest, then the house can be considered a business expense, and in that context you no longer qualify tax-free capital gains on the house. That is not true today, but I could see something like that happening in the future, if it gets out of hand and Revenue Canada and the government decide to go after this.

But my main beef with it is high risk and extensive leveraging.

I'd say most of the time, people would actually benefit more from the guaranteed return of paying down their mortgage debt quickly.
Sr. Member
Nov 10, 2003
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Concord
No reason not to get a HELOC.. it is simply a portion of your mortgage in a LOC form.
You will still have your monthly mortgage payment, plus a charge on interest on the HELOC.

The good thing is
#1 You can pay off the HELOC earlier without running into that early payment penalty.
#2 You can tap into your home equity anytime.
#3 Lastly, is better to have it now, than to get it when you need it.
Member
Sep 23, 2013
271 posts
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Calgary
HELOC's are money pits. The majority of people here will say that they use to to invest, etc.. But the reality is that for most people, they use it as "free money", and get into debt on unnecessary things like vacations. It discourages saving and is just another thing driving our "must have it now" mentality.

Back in the day people would save cash incase they ran into hard times. The theory now seems to be "get a HELOC so if you run into hard times you can just finance your life using debt!"
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Mar 23, 2009
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^^^ Yes HELOCs can be problematic, but they are also very convenient. For example I pay all my bills through my HELOC, because I don't have to check the HELOC's remaining balance variation throughout the month. For my chequing account if I go below $5000 I lose the fee-free status of my TD chequing account. So what I do is I pay bills through the HELOC, and the reconcile whenever necessary. If I do this often enough, interest is near $0.

I also have a non-secured line of credit, but I never use it because the interest rate is prime + 2%.

So right now I have a HELOC that actually has a $50 credit on it (cuz I overpaid by $50), and a non-secured LOC that has $0.

One big downside to HELOCs though are the setup charges.
Jr. Member
Apr 27, 2013
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Can you elaborate on the setup charges?


1
EugW wrote: ^^^ Yes HELOCs can be problematic, but they are also very convenient. For example I pay all my bills through my HELOC, because I don't have to check the HELOC's remaining balance variation throughout the month. For my chequing account if I go below $5000 I lose the fee-free status of my TD chequing account. So what I do is I pay bills through the HELOC, and the reconcile whenever necessary. If I do this often enough, interest is near $0.

I also have a non-secured line of credit, but I never use it because the interest rate is prime + 2%.

So right now I have a HELOC that actually has a $50 credit on it (cuz I overpaid by $50), and a non-secured LOC that has $0.

One big downside to HELOCs though are the setup charges.
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Mar 23, 2009
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Appraisal free, which would not be necessary if you already have an appraisal for the mortgage.
Legal fees
Admin fee maybe

So a few hundred bux.

I got mine waived by taking out $30000 for 3 months. Interest was $260 or something, which was less than the legal fees. I ended up putting some of that into my mortgage because I was expecting to get a lump sum payment anyway so I could pay most of it back shortly, and I didn't have a use for the $30000 otherwise, so in my case it was effectively much less than $260 but I realize that most people wouldn't have this option.

Also note that many banks will charge you a discharge fee, which sucks. Specifically, when I got my CIBC HELOC, there was no discharge fee, but now CIBC charges a discharge fee. That's also a couple of hundred bux.
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Oct 23, 2012
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I was told that if you owe money on your HELOC at the end of your term (eg 5 years) you won't be able to shop around for your renewal.
You would be stuck with the same institution and you will have to sign for the posted rate.
Without a HELOC you are free to shop around and negotiate on the rate for renewal.
Deal Guru
Dec 11, 2008
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dave8125 wrote: I was told that if you owe money on your HELOC at the end of your term (eg 5 years) you won't be able to shop around for your renewal.
You would be stuck with the same institution and you will have to sign for the posted rate.
Without a HELOC you are free to shop around and negotiate on the rate for renewal.
I dont think that is true. My parents always had a balance in their HELOC and they always shopped around and did not have to pay the posted rate on their mortgage.
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Dec 14, 2010
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speedyforme wrote: I dont think that is true. My parents always had a balance in their HELOC and they always shopped around and did not have to pay the posted rate on their mortgage.
+1

I'm fully borrowed on my HELOC and that was not an issue to renew the mortgage. No posted rate. Even if you have to sell the house it's not a problem, they just transfer the collateral to the new house.

Rod
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dave8125 wrote: I was told that if you owe money on your HELOC at the end of your term (eg 5 years) you won't be able to shop around for your renewal.
You would be stuck with the same institution and you will have to sign for the posted rate.
Without a HELOC you are free to shop around and negotiate on the rate for renewal.
Definitely not posted rate, but I too worried about having less bargaining power for the absolute best rate.

So, when I renewed in December 2012, I made sure I had exactly $0 in the HELOC when I called them. I negotiated for a 2.89% 5-year fixed in the end for a full-frills mortgage. I think the no-frills mortgages from smaller lenders were 2.79% at the time.

rodbarc, did you think you got an optimal rate as well? Just wondering. Or were you say 0.1% or 0.2% higher?
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Jan 2, 2012
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EugW wrote: Definitely not posted rate, but I too worried about having less bargaining power for the absolute best rate.
Why would you get any rate worse then the best rate going? Having an active HELOC makes zero difference. Just shop the mortgage around and if you find a similar product elsewhere for a better rate, then switch lenders and your mortgage/HELOC will be swapped over to the new one.
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rob444 wrote: Why would you get any rate worse then the best rate going? Having an active HELOC makes zero difference. Just shop the mortgage around and if you find a similar product elsewhere for a better rate, then switch lenders and your mortgage/HELOC will be swapped over to the new one.
The problem with switching lenders is because you will incur a discharge fee on the old HELOC, and you may incur new setup fees with the new lender. Furthermore, when you switch lenders you cannot take advantage of a 90 day penalty-free early renewal. Depending on the rate differential, you could save hundreds from that alone.

If you add up all of those fees it could be many hundreds of dollars, unless you're lucky and find a lender that will cover most of the fees for you. That is not always the case when you want the absolute best rate.
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EugW wrote: The problem with switching lenders is because you will incur a discharge fee on the old HELOC, and you may incur new setup fees with the new lender. Furthermore, when you switch lenders you cannot take advantage of a 90 day penalty-free early renewal. Depending on the rate differential, you could save hundreds from that alone.

If you add up all of those fees it could be many hundreds of dollars, unless you're lucky and find a lender that will cover most of the fees for you. That is not always the case when you want the absolute best rate.
All of what you said will occur no matter if you have a HELOC being used, or at $0 balance.

Usually a new lender will offer to pay most fees in order to get you as a customer (moreso if you know how to negotiate). Like anytime a mortgage is up for renewal, you should always compare the costs vs the benefit you'll get with a lower rate. If you switch, your biggest fees will be the discharge (I think around $100) and the lawyer fees (couple hundred dollars). However on say a $300K mortgage, even getting a 0.1% better rate will save you almost $1500 over a 5 year term and beat out any upfront fees. So in most cases it's worth it to switch.

Of course its much easier and less hassle to say with a current lender, so it's always good to first shop around, and then challenge your current lender to match the best rate you can find. Many times they will match it if you convince them you will walk away for the lower rate. Most lenders are counting on the fact that people leave their renewal too late so don't have time to get a new lender, or that they will simply stay because they can't be bothered going through the whole qualification process with a new lender.
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rob444 wrote: All of what you said will occur no matter if you have a HELOC being used, or at $0 balance.

Usually a new lender will offer to pay most fees in order to get you as a customer (moreso if you know how to negotiate). Like anytime a mortgage is up for renewal, you should always compare the costs vs the benefit you'll get with a lower rate. If you switch, your biggest fees will be the discharge (I think around $100) and the lawyer fees (couple hundred dollars). However on say a $300K mortgage, even getting a 0.1% better rate will save you almost $1500 over a 5 year term and beat out any upfront fees. So in most cases it's worth it to switch.

Of course its much easier and less hassle to say with a current lender, so it's always good to first shop around, and then challenge your current lender to match the best rate you can find. Many times they will match it if you convince them you will walk away for the lower rate. Most lenders are counting on the fact that people leave their renewal too late so don't have time to get a new lender, or that they will simply stay because they can't be bothered going through the whole qualification process with a new lender.
Well, I'm thinking it's also easier to say you're going to walk away if you don't actually need the HELOC, because you can go to say with a smaller lender that doesn't offer one. They often seem to be the ones driving with the lowest rates.
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EugW wrote: Well, I'm thinking it's also easier to say you're going to walk away if you don't actually need the HELOC, because you can go to say with a smaller lender that doesn't offer one. They often seem to be the ones driving with the lowest rates.
Not necessarily. A good mortgage broker can often get your the best rate on the market, with a mortgage/readvanceable HELOC product.

The only thing i'm not entirely sure of, is if you got the original mortgage/HELOC product under old 80% LTV rules which is now grandfathered in, can your current lender renew your mortgage under the same 80% rules, or are they forced to switch your HELOC to a 65% LTV one? If your current lender could leave it at 80% at renewal AND adjust it to match your new homes appraisal value, that would be a HUGE incentive to stay with current lender. It's a decision i'll be faced with next year.

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