Back in the ’90s, I worked in an office plastered with motivational posters that used images like people rowing in unison to extoll the virtues of teamwork.
The management’s public face was hippy dippy, but actions didn’t mirror words. Revenge was in order.
A colleague ordered a flock of mock motivational posters from a website and, one night, several of us stayed after hours to swap the joke posters into frames around the office. The one I hung in the main boardroom depicted a man falling off a cliff with the caption, “Sometimes you lead by example—of what not to do.”
When it comes to properly taking advantage of a home equity line of credit (HELOC), a highly useful tool for the self-employed, I’m the guy falling off the cliff.
After immigrating to Canada in 2004, I enjoyed 11 years of stable employment at a large media conglomerate. I bought a house in 2006, and paid it off by the end of 2013.
I’d toyed with the idea of opening a HELOC when things started looking unstable at my workplace, but resisted because I had substantial savings—I was solvent, why incur debt? I got the answer when my company laid off 200 people in my division, myself included.
Knowing that job hunting in one’s 50s is a mug’s game, I opted to become a freelancer. And I’d heard from many freelancers that having a HELOC, open and in reserve, was a great way to cover household cash flow in the event a client was late with a payment. Many stressed they never actually tapped their lines of credit, but slept better knowing the option was in place.
So, I assembled the documents showing my house was paid off and marched down to my bank. Imagine my surprise when the first question was, “And who is your current employer?”
It got awkward fast.
I had to admit I was newly self-employed and with only a few clients. The fact that I’d been receiving regular salary payments for more than 11 years was of no benefit, my banker told me. While I could, theoretically, apply immediately, the lump-sum severance payments would hit my account during the lag-time in the approval process and cause the HELOC application to be flagged.
I’d assumed, incorrectly, that owning my home outright would make acquiring a credit line a walk in the park. And that’s a problem because HELOCs are among the most flexible borrowing options available to consumers.
First and foremost, they’re easy to use. If you need credit, you can tap it quickly because lines of credit don’t require separate loan-application processes each time you need cash. Even better, you can borrow smaller amounts as needed—giving HELOCs an advantage over vehicles like second mortgages, which can spur you to borrow more than you need as a hedge against getting caught short.
Many HELOCs also permit interest-only payments each month, allowing you to free up income for immediate spending, rather than debt servicing. And, the payoff regime is flexible to allow reduction of principal owed as cash is available—generally without any penalty for prepayment.
Interest rates also are set at a certain number of basis points above prime (currently 2.7%), making a HELOC cheaper than many other borrowing options.
Chatting with an advisor who works with wealthy clients last week, he mentioned he tells every client he works with—regardless of solvency levels—to go ahead and open a HELOC. In his view, it’s cheap insurance against running out of cash that costs nothing (beyond setup charges) if it’s not used.
It’s good advice in an economic environment in which employers are being pushed hard by shareholders to reduce their numbers of full-time staff. These days, anyone can wake up to find they’re a small businessperson.
And, while that can spell opportunity, it also can be economically scary. If you have a steady income now, and are fortunate enough to own real estate, it could be worth your while to open a line of credit. You may never use it, but it’s better not to that guy falling off the cliff.