Your HELOC Minimum Payment Isn't Actually a Payment
Your HELOC Minimum Payment Isn't Actually a Payment
A $200,000 HELOC at 7.2% prime costs you $1,200 a month in interest. Pay exactly $1,200, and the balance stays $200,000. Forever.
That's not a minimum payment in the mortgage sense, where part of what you hand over reduces the principal. It's interest-only. The $1,200 buys you the right to owe the same amount next month. Most people who take out a home equity line of credit understand this in theory. In practice, the psychology is different. Interest-only feels like a cost you can control, like hydro or property tax. It isn't. It's the rent you pay on money you already borrowed, and the landlord is the Bank of Canada.
The Qualification Test Is Tighter Than the Marketing Suggests
Scotiabank and TD will happily tell you that a HELOC gives you "flexible access" to your equity. What they don't lead with is that qualifying for one now involves the same mortgage stress test that applies to a new purchase. You don't get approved at prime. You get stress-tested at prime plus 2%, which as of early 2024 sits around 9.2%.
On that same $200,000 line, the bank wants to see that you can afford the payments at $1,533 a month, even though you'll only owe $1,200 if you draw the full amount right away. The test exists because OSFI learned, the hard way, that people who can barely afford the minimum at approval get crushed when rates move. The stress test doesn't stop you from borrowing. It just makes sure fewer people end up unable to service what they took.
For a household pulling $140,000 combined in Kitchener, that $1,533 monthly ghost payment eats into your debt-service ratio before you've written a single cheque. If you're also carrying a mortgage and a car loan, the HELOC you thought was automatic suddenly isn't.
Rate Moves Hit Harder Because the Payment Is All Interest
A mortgage amortizes. Half your payment is interest, half goes to principal, and the ratio shifts over time. Rate hikes hurt, but part of what you pay still builds equity. A HELOC has no such cushion.
When prime jumps 100 basis points, your $1,200 monthly interest bill becomes $1,400. That's $200 more, and none of it reduces what you owe. Another 100 bps and you're at $1,600. By the time prime has climbed from 2.45% in March 2022 to 7.2% by mid-2023, a fully drawn $200,000 HELOC went from costing $408 a month to $1,200. The same balance, triple the carrying cost.
Mortgage holders with fixed terms got a few years of breathing room before renewal. HELOC holders absorbed every hike in real time, 25 basis points at a time, eight times in sixteen months.
What This Means If You're Using It to Fund a Rental Property
The classic move in Waterloo Region over the last decade was to pull HELOC equity from a primary residence and drop it into a down payment on a rental condo near the universities. The rental income, in theory, covers the HELOC interest. But only if the rent stays stable and the rate doesn't move.
A one-bedroom near Wilfrid Laurier that rents for $1,650 a month looked fine when the HELOC servicing a $100,000 draw cost $200. At $600 a month now, the math is upside down before property tax and maintenance. The investor either feeds the gap from employment income or sells into a softer market where preconstruction investors are also trying to exit.
The HELOC didn't break. The strategy did. Interest-only borrowing works when rates fall or stay flat, and it's fragile when they don't.
Pay interest forever, or pay down the line when cash flow allows. Most people mean to do the second. Life gets in the way. The balance lingers. That's the design.
Your HELOC Minimum Payment Isn't Actually a Payment
A $200,000 HELOC at 7.2% prime costs you $1,200 a month in interest. Pay exactly $1,200, and the balance stays $200,000. Forever.
That's not a minimum payment in the mortgage sense, where part of what you hand over reduces the principal. It's interest-only. The $1,200 buys you the right to owe the same amount next month. Most people who take out a home equity line of credit understand this in theory. In practice, the psychology is different. Interest-only feels like a cost you can control, like hydro or property tax. It isn't. It's the rent you pay on money you already borrowed, and the landlord is the Bank of Canada.
The Qualification Test Is Tighter Than the Marketing Suggests
Scotiabank and TD will happily tell you that a HELOC gives you "flexible access" to your equity. What they don't lead with is that qualifying for one now involves the same mortgage stress test that applies to a new purchase. You don't get approved at prime. You get stress-tested at prime plus 2%, which as of early 2024 sits around 9.2%.
On that same $200,000 line, the bank wants to see that you can afford the payments at $1,533 a month, even though you'll only owe $1,200 if you draw the full amount right away. The test exists because OSFI learned, the hard way, that people who can barely afford the minimum at approval get crushed when rates move. The stress test doesn't stop you from borrowing. It just makes sure fewer people end up unable to service what they took.
For a household pulling $140,000 combined in Kitchener, that $1,533 monthly ghost payment eats into your debt-service ratio before you've written a single cheque. If you're also carrying a mortgage and a car loan, the HELOC you thought was automatic suddenly isn't.
Rate Moves Hit Harder Because the Payment Is All Interest
A mortgage amortizes. Half your payment is interest, half goes to principal, and the ratio shifts over time. Rate hikes hurt, but part of what you pay still builds equity. A HELOC has no such cushion.
When prime jumps 100 basis points, your $1,200 monthly interest bill becomes $1,400. That's $200 more, and none of it reduces what you owe. Another 100 bps and you're at $1,600. By the time prime has climbed from 2.45% in March 2022 to 7.2% by mid-2023, a fully drawn $200,000 HELOC went from costing $408 a month to $1,200. The same balance, triple the carrying cost.
Mortgage holders with fixed terms got a few years of breathing room before renewal. HELOC holders absorbed every hike in real time, 25 basis points at a time, eight times in sixteen months.
What This Means If You're Using It to Fund a Rental Property
The classic move in Waterloo Region over the last decade was to pull HELOC equity from a primary residence and drop it into a down payment on a rental condo near the universities. The rental income, in theory, covers the HELOC interest. But only if the rent stays stable and the rate doesn't move.
A one-bedroom near Wilfrid Laurier that rents for $1,650 a month looked fine when the HELOC servicing a $100,000 draw cost $200. At $600 a month now, the math is upside down before property tax and maintenance. The investor either feeds the gap from employment income or sells into a softer market where preconstruction investors are also trying to exit.
The HELOC didn't break. The strategy did. Interest-only borrowing works when rates fall or stay flat, and it's fragile when they don't.
Pay interest forever, or pay down the line when cash flow allows. Most people mean to do the second. Life gets in the way. The balance lingers. That's the design.
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