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When HELOCs Don’t Work for Emergencies

3 September 2012

Not that long ago we published a post talking about how for many homeowners, it can make a lot of sense to use a HELOC as an emergency fund. That advice was timely, as a recent CIBC survey has just shown that 40 per cent of Canadians don’t have an emergency fund of any kind. It’s a practice that many Canadians have already put in place; the Canadian Association of Accredited Mortgage Professionals has stated that 34 per cent of mortgage holders have a HELOC, and that many are in fact using them as emergency funds. But this strategy won’t work for all homeowners.

“Over the last decade, lines of credit have replaced emergency funds in the Canadian economy,” says John Parker, a mortgage broker in B.C.

That certainly seems to be true, especially considering that the amount of homeowners carrying a HELOC has risen 170 per cent since 2001. But not all homeowners have the option of taking out a HELOC. These loans require that a homeowner has at least 20 per cent equity in their home; and one out of five homeowners just don’t have it.

So then, what’s the answer?

Unfortunately, it’s simply saving until you have enough – and the saving should begin before you ever even start looking at different homes to purchase. So just how much should you have saved up? The rule of thumb is typically three to four months worth of living expenses. But if homeowners can save up that much before moving into their new home, the chances might also be good that they have enough to contribute to their down payment – counteracting the need to save up an emergency fund.

Still, saving up is definitely worth it; and chances are, that the time it takes won’t push too many people out of the Canadian housing market.

“The risk of being priced out of the market is less than it’s been in a long time,” says Mr. Parker. “In most places, prices are unlikely to increase by any significant number for the next few years.”

Saving in today’s economic environment isn’t easy, that’s for sure. With interest rates so low, people are earning only a measly 1 or 2 per cent on what they’ve banked; and things are getting more expensive by the day. Unfortunately though, for those who don’t have any savings and won’t be able to apply for a HELOC, it’s the only way to safeguard your future home – and your future finances.

Without this type of fund, even the smallest thing going wrong once inside the home can be enough to send people into a downward tailspin, missing mortgage payments and possibly even going into foreclosure.

To weigh in on this subject, please leave a comment below and let us know what you think. Or, like our Facebook page and start talking!

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