Home equity lines of credit—or HELOCs—are extremely popular in Canada. In fact, around three million Canadians take advantage of this flexible borrowing option.
Their popularity is understandable. If you have sufficient equity in your home, you can access an agreed amount of money at an interest rate that is considerably less than many other loan options (it’s currently around 3.45%). You’re only charged interest when you start borrowing from the agreed sum, and monthly payments can be interest only. You can borrow the money again after paying it back.
This flexibility makes HELOCs a good option for all sorts of reasons, such as large purchases, renovations or as an emergency fund. HELOCs can be particularly attractive for retirees right now, as they provide an alternative to cashing in investments that are at a fraction of their pre-COVID-19 value.
However, the financial pressures that the COVID-19 crisis has brought to many Canadians means that HELOC options could become much less accessible than before.
Why banks may be more reluctant to provide HELOC options
A recent report in the Financial Post suggested that applying for a HELOC may become much more difficult after the current crisis. Many people experiencing financial difficulty are currently getting by thanks to government crisis stimulus and mortgage/loan deferrals. If those stop before everyone is back at work, many people could start considering HELOC options to stay afloat.
A major Canadian bank is already tightening its HELOC rules. In the US, two large bank have gone even further and made applying for a HELOC that much harder. They are increasing credit score requirements in an attempt to reduce successful HELOC applications by as much as 75%. They’re also offering considerably smaller loans than before.
If you’re considering taking out a HELOC and your bank turns you down, what alternatives to HELOCS are there? We take a look at a HELOC vs home equity loan alternatives, a mortgage refinance vs a HELOC, a cash out refinance vs a HELOC and other HELOC alternatives.
Your HELOC options when the bank says no
As a homeowner, there are thankfully plenty of HELOC alternatives out there. Here are the pros and cons of the most popular HELOC options.
- HELOC vs home equity loan
A home equity loan is typically easier to get than a HELOC. It’s similar to a personal loan in that you usually have to pay off principal and interest over a set timeframe. However, because it is secured against your home, rates can be considerably lower than with unsecured loans.
The main advantage of a HELOC vs a standard home equity loan is that a HELOC is far more flexible. You can just make interest payments, rather than more rigid principal and interest payments required with most home equity loans. However, if you can afford the payments, a home equity loan can be a good second option.
- Mortgage refinance vs HELOC
A mortgage refinance (or cash out refinance) is one of the best home equity loan alternatives and has several advantages over a HELOC. Interest rates are typically lower, and you get to pay off principal as well as interest, over the amortization period of your mortgage.
The disadvantages of a mortgage refinance vs HELOC are that they can be difficult to qualify for and your higher mortgage payments could become harder to manage. Another disadvantage of a cash out refinance vs HELOC is that you may have to pay certain closing costs, such as appraisal and legal fees.
- Personal loans
Personal loans can provide a good alternative to HELOCs. They can be unsecured (in which case they normally have higher interest rates) or secured against something valuable you own, such as a car. Secured personal loans are among the cheaper HELOC options.
The disadvantages of these HELOC alternatives are that rates can be considerably higher than HELOCs (especially if your credit score is not excellent). They can still be hard to qualify for, and repayment terms are much less flexible.
- Credit card cash advances
If you can get a card with an introductory rate of 0% for a decent period of time, these can be good HELOC alternatives. However, be sure to plan so that you can pay off the amount borrowed before the time limit. Otherwise, you will be stuck with extremely high-interest debt that can be difficult to pay off.
An alternative to a HELOC just for retirees
The CHIP Reverse Mortgage®, available to homeowners aged 55-plus, could be the best alternative to HELOCs for some retirees. It allows you to cash in up to 55% of your home’s value without forcing you to make regular mortgage repayments. You only pay what you owe once you sell your home or move out.
Here are some of the key advantages of a reverse mortgage versus other home equity loan alternatives:
- Easily affordable repayments – because there aren’t any monthly repayments required
- Considerably lower interest rates than most other HELOC alternatives
- Easier to qualify for: income and credit score are not taken into account
If you’re looking for an alternative to HELOCs, call us today at 1-866-522-2447 to find out how much you could borrow.
