John Allen Paulos had it right. In life, uncertainty is the only certainty.
And sometimes the best antidote to all that uncertainty is home equity you can rely on.
Equity, coupled with responsible credit management, releases funds that can save your financial skin – if your financing is structured correctly in advance.
The most common and flexible tool for this job is a home equity line of credit, or HELOC. The prerequisites for this are usually a solid credit rating, sufficient income and a marketable property with at least 20 percent equity.
Of course, not everyone is convinced that HELOCs are a good move. According to the survey, only about one in three Canadian homeowners own one.
Many people don’t even think about it or shy away from having access to other assets. This is despite the fact that liquidating assets, including withdrawing funds from RRSPs or investments, is not always wise.
A low-cost HELOC that can be paid back at any time without penalty is often the smarter option. This strategy is particularly suitable for short-term bridging until better financing becomes available, or for long-term, tax-deductible borrowing to finance income-producing investments.
As for why you might need a HELOC in 2026, this year will be a cauldron of unpredictability. Let’s start with the pleasant reasons, such as the ability to act when opportunities arise.
For example, HELOCs can be useful if…
Real estate is sold
Real estate values could easily shrink in multiple pockets across the country. This or other catalysts could create an opportunity too good to miss.
For example, it is not inconceivable that condo prices in Toronto will decline by an additional 10 to 20 percent (not a forecast), despite long-term net immigration to the region and a future supply shortage due to current underdevelopment.
Or perhaps an estate is selling a family home at a bargain price and you need to act quickly with an offer.
Stocks are sold at a discount
It is equally plausible that the US, China or Russia do something reckless that hurts the markets. Personally, in the event of a Taiwanese invasion or an AI bust, I wouldn’t want to have anything to do with stocks unless they were severely oversold, but when we’re talking about a 30 to 40 percent discount, that’s compelling, despite the potentially long road back for the markets.
Or perhaps another pandemic, geopolitical shock, tariff war, or other chaos will cause inflation to rise and stock prices to fall.
For a borrower well-suited to leveraged investing (i.e., a borrower with a ten-year investment horizon, other liquid assets, risk tolerance, etc.), purchasing broad, diversified stock indices with price declines of 25 percent or more using tax-deductible debt can be a legitimate way to build net worth.
Other possibilities arise
Maybe you:
- Have a child who has the potential to attend a really good but expensive post-secondary institution
- Discover a great business opportunity
- You have a lot of debt that needs to be consolidated in the short term
- Repairs or renovations need to be carried out
- Want to add a “mortgage helper” (secondary suite) to improve cash flow?
- You want to buy out a business partner
- Looking to add solar panels to combat rising electric bills?
These are some positive reasons. Now let’s move on to the darker chapters where a HELOC stops being smart and starts being a lifesaver.
You’ll lose your job
Artificial intelligence will ultimately eliminate millions of wage jobs in this country, partially offset by the creation of new jobs. And even if you’re only unemployed for six months, the safety net of a HELOC can preserve your sanity and lower your blood pressure.
Income can just as easily disappear if competitors eat lunch, companies downsize or move out of Canada, government spending is cut, or some other unspectacular reality intervenes.
A catastrophe occurs
A natural or one-off disaster can destroy a home or property without warning. If you act quickly, HELOCs can be an immediate source of liquidity to help you get back on your feet.
Remember that HELOCs are needs loans. For example, if your house burns down, you can expect your HELOC access to be frozen as soon as the lender finds out and you will still have any remaining debt.
In this situation, lenders can even demand repayment. However, if you paid as agreed, have valid insurance that names the lender as the payee for the loss, and the proceeds are sufficient to cover the debt, they won’t necessarily pull that lever.
For those who are not in default, lenders typically seek to protect their chances of recovery and avoid the borrower’s reputational and bankruptcy risks that come with forcing immediate repayment after disasters.
Other unfortunate scenarios
The list of ways things can go wrong is virtually endless but includes:
- A serious illness
- A comprehensive special assessment for condominiums
- A lawsuit
- A separation/divorce and sudden purchase of the marital home
- Sick or insolvent parents who need care
- An unexpected tax bill
The point is that HELOCs can be invaluable tools to help you overcome difficulties or build your wealth.
Of course, they can also get people into trouble if they spend money carelessly. Easy access may encourage some to borrow more than they should.
In these cases, missing even one or two payments can result in a frozen HELOC, especially if the lender notices deteriorating credit quality or declining property values, which it often monitors on an ongoing basis.
Then HELOCs fail as safety nets. In fact, some borrowers have been known to withdraw their money in advance in anticipation of a freeze and park the money in a high-interest account at another institution.
Fortunately, high-risk borrowers are in the minority because it’s not easy to qualify for low-cost HELOCs. As credit scores rotate, lenders tend to be more selective and prefer borrowers who have a history of responsible money management.
In most cases, that means a credit score of over 700, a reasonable level of debt relative to income, and enough verifiable income to pass the exam.
Quick tip:
Banks also offer programs for borrowers with less verifiable income as long as they have numerous other assets.
It’s also worth noting that mortgage brokers can access alternative lenders with more relaxed HELOC rules, although the price will increase accordingly. Instead of Prime-to-Prime plus 0.50 percent (4.45 percent) rates for a standard HELOC, alternative HELOCs offer Prime-plus three percent plus rates and higher setup fees.
In very limited situations, more expensive HELOCs may still make sense for emergencies or consolidations, but only with sound, personal advice. What you don’t want is to be drawn into a debt spiral by the costly interest charges of an alternative lender.
Last but not least, HELOCs come with risks because their interest rates are variable. If you have $200,000 in HELOC debt and interest rates rise from today’s 4.95 percent to 7.70 percent in 2023, your interest-only payment will increase from $825 to $1,283 per month.
Of course, you can borrow from the HELOC to make payments in an emergency, but if you rely on it regularly, fix a leak by drilling new holes.
The advantage is that HELOCs are open-ended, meaning you can lock in a fixed-rate loan with your current lender or another lender at any time—assuming you qualify. However, keep in mind that switching lenders may involve slightly higher closing costs than a standard mortgage, although this is not remotely ruinous.
No matter how you look at it, HELOCs remain a powerful source of flexibility for well-qualified borrowers with equity and self-control. Most homeowners should at least consider purchasing such a device, as it often costs nothing when not in use.
And if you’re concerned that your property value may decline – and your equity is between 20 and 30 percent – it may be wise to act sooner rather than later.
The ideal time to set up a HELOC is when approval is easiest and there is no urgency in sight.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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