Personal Finance

HELOC help - What am I missing?

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  • Dec 19th, 2020 12:09 pm
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[OP]
Newbie
May 8, 2012
26 posts
15 upvotes
Toronto

HELOC help - What am I missing?

Accessed Property value - 110k
Mortgage remaining - 35k @ 2.9%
Cash/TFSA/Inheritance etc. after tax = 36K

I could take the cash(35k from the 36k) and pay off my mortgage.
Then take out a HELOC for 65% of the accessed value of the property at say 2.9% = 71.5k

I could then take out the 35K from this 71.5K to replenish my cash/tfsa etc and pay 2.9% interest.

My understanding/questions on the HELOC:
- There is a draw period and repayment period. Is this correct?
- How long is a HELOC for? I hear 5-25 years?
- So during the draw period, I only have to pay interest? And then I have to pay the repayment?
- In my case above, I will have to payback the 35K with interest after the draw period?
- Could I just payback the 35K and then get a new HELOC so basically constantly staying in a draw period?

Can someone suggest a reliable source - person/.website etc. for this sort of info?

Thanks all.
8 replies
Deal Expert
User avatar
Aug 18, 2005
20080 posts
4621 upvotes
Burlington-Hamilton
The main thing you're not considering is whether HELOCs could be limited or called by the bank during future unforeseen financial crises.

Leaving yourself with $1K cash to your name is like inviting Murphy's Law to activate on you.
Just keep a cash buffer emergency fund and pay off your mortgage from your income.

If you actually want to do something like this, make sure you keep the bulk of your cash in a bank that is NOT the same as the one financing the HELOC.
- casual gastronomist -
Deal Addict
Jul 15, 2009
2208 posts
1357 upvotes
mcarfan wrote: Accessed Property value - 110k
Mortgage remaining - 35k @ 2.9%
Cash/TFSA/Inheritance etc. after tax = 36K

I could take the cash(35k from the 36k) and pay off my mortgage.
Then take out a HELOC for 65% of the accessed value of the property at say 2.9% = 71.5k

I could then take out the 35K from this 71.5K to replenish my cash/tfsa etc and pay 2.9% interest.

My understanding/questions on the HELOC:
- There is a draw period and repayment period. Is this correct?
- How long is a HELOC for? I hear 5-25 years?
- So during the draw period, I only have to pay interest? And then I have to pay the repayment?
- In my case above, I will have to payback the 35K with interest after the draw period?
- Could I just payback the 35K and then get a new HELOC so basically constantly staying in a draw period?

Can someone suggest a reliable source - person/.website etc. for this sort of info?

Thanks all.
If you're already paying 2.9% on the 35k mortgage, what's the point of converting it into a 35k HELOC and still paying the same 2.9% on the same 35k?

You don't need to pay off the mortgage first to take out a HELOC on top of it.

There is no draw period or repayment period unless you're in the US. The duration is unlimited until you decide to close it. HELOC is like a chequing account with a negative balance. You take money out whenever you want and pay back whenever you want. There is a minimum monthly payment, typically interest only.
Deal Fanatic
Apr 5, 2016
5181 posts
3687 upvotes
Calgary/Vancouver
Sorry OP, gonna borrow your thread to rant cause I just had this crazy client. Maybe you guys can enlighten me.

I had a client who has a $200k mortgage 1.8% fixed with a $200k HELOC at 2.95%. He said he wants to pay off the mortgage with the HELOC and in the long run will end up paying faster and less interest than if its in a mortgage. Then told me about compounding interest vs simple interest. I tried to educate him that mortgages are only compounded semi annually and HELOC are compounded monthly. Nope, would not take my advice and he paid off the mortgage plus the penalty. Said he can also make lump sum payments here and there with no penalty. I know for a fact this guy does not have the extra cash to just put lump sums >20%. I am going to go nuts!
Member
Jan 24, 2004
483 posts
75 upvotes
bomber17 wrote: Sorry OP, gonna borrow your thread to rant cause I just had this crazy client. Maybe you guys can enlighten me.

I had a client who has a $200k mortgage 1.8% fixed with a $200k HELOC at 2.95%. He said he wants to pay off the mortgage with the HELOC and in the long run will end up paying faster and less interest than if its in a mortgage. Then told me about compounding interest vs simple interest. I tried to educate him that mortgages are only compounded semi annually and HELOC are compounded monthly. Nope, would not take my advice and he paid off the mortgage plus the penalty. Said he can also make lump sum payments here and there with no penalty. I know for a fact this guy does not have the extra cash to just put lump sums >20%. I am going to go nuts!
So, he used a loan with 2.95% interest rate to pay off a loan with 1.8% AND had to pay a penalty for paying it off? Unless there is something I'm missing, the math doesn't look right.
Deal Fanatic
Apr 5, 2016
5181 posts
3687 upvotes
Calgary/Vancouver
zeroace wrote: So, he used a loan with 2.95% interest rate to pay off a loan with 1.8% AND had to pay a penalty for paying it off? Unless there is something I'm missing, the math doesn't look right.
That’s why I’m dumbfounded how he possibly be saving money this way LOL. Tthe sad thing is, it’s his parents mortgage he’s playing around with and his parents trust him.
[OP]
Newbie
May 8, 2012
26 posts
15 upvotes
Toronto
bubak wrote: If you're already paying 2.9% on the 35k mortgage, what's the point of converting it into a 35k HELOC and still paying the same 2.9% on the same 35k?

You don't need to pay off the mortgage first to take out a HELOC on top of it.

There is no draw period or repayment period unless you're in the US. The duration is unlimited until you decide to close it. HELOC is like a chequing account with a negative balance. You take money out whenever you want and pay back whenever you want. There is a minimum monthly payment, typically interest only.
Thanks for this.

The difference between the mortgage and the HELOC is that even at 2.9% for each - in the HELOC I only have to pay interest indefinitely.

This obviously assumes there are no catastrophic events the requires me to settle the HELOC principal immediately etc.

Seems too good to be true ...
Deal Fanatic
User avatar
Aug 24, 2016
8010 posts
8406 upvotes
The Prairies
bubak wrote: If you're already paying 2.9% on the 35k mortgage, what's the point of converting it into a 35k HELOC and still paying the same 2.9% on the same 35k?
Mortgage = Principle+interest payment each month
HELOC = Interest only payments each month

End result, brings down your monthly payment, however it leaves the door open to never paying off that debt from the house.
[OP]
Newbie
May 8, 2012
26 posts
15 upvotes
Toronto
coolintheshade wrote: Mortgage = Principle+interest payment each month
HELOC = Interest only payments each month

End result, brings down your monthly payment, however it leaves the door open to never paying off that debt from the house.
Thanks for this explanation. Appreciate it.

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