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Home equity lines of credit are the sharpest tool in the shed.

There’s no smarter way to borrow for short periods of time than a home equity line of credit because the rate is the lowest most people can hope for.

Today, that’s not saying much. The Bank of Canada’s campaign to pound down inflation using interest rate hikes raises the cost of using the HELOCs and everything else in the borrowing toolshed. The heyday of the HELOC is done for now – they’re too expensive to be our handy way to borrow for fun and profit any time soon.

Have a HELOC, but keep it behind glass. Use it only for emergencies or situations where you know you’ll be able to repay what you borrowed in a matter of months.

The interest rate on HELOCs is set at your bank’s prime lending rate, usually with a small markup that might add another 0.5 of a percentage point. After the increase in the Bank of Canada rate last week, the prime rate across banking is 5.95 per cent and HELOCs commonly go for 6.45 per cent.

Today, we have mortgages at 5 to 6 per cent, as well as 6.45 per cent HELOCs. Anyone who paid attention to their finances in the 1980s and early ‘90s will scoff at the idea that these rates are exceptional. But if your borrowing experience is based on recent experience, they definitely are.

At the beginning of 2022, the rate on a typical HELOC was 2.95 per cent. If you borrowed $30,000 on your HELOC, the minimum monthly payment of interest only was $73.75.

The comparable amount today is more than double at $161.25. That’s a lot of money to pay each month simply to keep your HELOC in good standing, without any chipping away at the principal.

The era of cheap HELOCs was one of the decisive periods in Canadian personal finance. Marketed relentlessly by banks, HELOCs became standard household equipment. Available and affordable, they allowed users to access four-, five- and six-figure borrowing with ease. You can write cheques off your HELOC, or just click the money into your chequing account using an app or bank website.

It’s hard to pin down cause and effect, but HELOCs gained traction as Canadians lost their aversion to borrowing and carrying debt for anything but houses and maybe cars. As HELOC balances grew, so did the ratio of household debt to disposable income.

The latest reading on this gauge of indebtedness was close to 182 per cent, or $1.82 in debt for every $1 of after-tax income. This ratio has been on the rise for decades, in part thanks to people learning to use their HELOCs, as the cliché goes, like an ATM.

Drawing on your HELOC to pay for trips, furniture, electronics and other forms of consumption felt mildly transgressive, but excusable because the cost was low and everyone else was using theirs. Who hasn’t heard this line at least once: “Our mortgage is paid off, but we do have a HELOC balance.”

Judging people for past use of HELOCs to finance their lifestyle is pointless – it’s more a reflection on our society’s emphasis on consumption than our financial discipline. So, let’s look forward. Until interest rates come down from peak levels, HELOCs are too expensive to use as an extension of your household income.

The threat of recession reinforces the need to holster your HELOC. Recessions can affect incomes and career trajectories. It’s best not to expect future bonuses or pay increases to pay off a HELOC balance down the line.

HELOCs have been for consumption-related “bad debt,” and so-called good debt incurred to buy investments that have the potential to rise in value. For example, stocks and real estate.

Here’s the problem with using HELOCs to invest today: Your cost of borrowing will very likely cancel out returns from investing on an after-fee, after-tax basis. The worst possible result is that you pay interest at 6.45 per cent for the purchase of assets that fall in value.

If you have to borrow, HELOCs are still the cheapest and most flexible way to do it. What’s changed is the cost of using a HELOC. It’s way up compared with a year ago and could increase yet again by another 0.25 to 0.5 of a point. Stay tuned for the next Bank of Canada rate setting on Dec. 7.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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