The Bank of Canada governor Mark Carney has been warning us all about taking on too much debt while borrowing rates are low; stating that when they rise, that debt will become unaffordable and leave many Canadian households strapped. But while this is sound advice, it’s also sound advice to capitalize on borrowing at a time when rates are low – one reason why BoC hasn’t raised them in so long. One way to seize the opportunity of the low rates and borrow wisely so that you’re not one of the households left out in the cold, is to take out a second mortgage such as a HELOC and use it as an emergency fund.
Many households already have an emergency fund put into place; and those who don’t should. How it works for many people now is that they receive their paycheque; they pay their mortgage and other monthly bills; and then they split up the rest accordingly. Often some of that leftover is put into a second account, typically a savings or high-interest savings account, and is reserved as an “emergency fund.” These funds of course, can then be tapped into when a household runs into unexpected circumstances such as medical expenses or job loss. While this is definitely a good way to save, and any saving is better than none, there is a better way to do it.
That way is to take out a home equity line of credit (HELOC) on your home. HELOCs allow you to tap into the equity you’ve built up in your home and they have a much lower interest rate on them then other types of borrowing, such as high-interest credit cards – a tool many turn to when they run into unforeseen circumstances. But high interest will only put you deep into debt at a time that you can least afford it.
In addition to the benefit of borrowing at low costs, using your HELOC as an emergency fund also has the benefit of allowing you to pay it back whenever you can, with the exception of interest that has accrued. This will be due every month but when you pay back the principal is up to you. This can also be advantageous when the emergency goes on for some time, such as when an individual can’t find work for some time after losing a job.
Should you never run into an emergency, you also don’t ever have to use the funds – but the income you’re making on a monthly basis is still fully up for grabs. All of that income, without ever having to take some and put it aside in a savings account. This is definitely one of the biggest benefits of using a HELOC, and not a savings account, as an emergency fund.