Home Equity Line of Credit (HELOC)

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A Home Equity Line of Credit (HELOC) is a secured (by your home) revolving line of credit that allows you to access the equity in your home. So, as you pay off your mortgage and build equity in your home, you are able to re-borrow a portion of these funds. You can use HELOC funds at your discretion: for renovations, debt consolidation, higher education, or anything else you please.

Home equity is the current market value of a house minus any remaining mortgage balance. It is essentially the built up ownership of a property through appreciation in addition to reductions in the mortgage principle made through payments.

With HELOC mortgages, the entire line of credit is not advanced upfront. Rather, a homeowner can use as much or a little of the HELOC as they choose, and you only pay interest on the amount you withdraw. Interest is calculated daily at a variable rate that fluctuates with the prime rate. The HELOC rate is, however, higher than a regular variable mortgage rate and its relationship to prime is not always consistent. For example, whereas variable mortgage rates are typically stated as a set premium/discount (+/-) to the prime rate, the relationship between a HELOC and prime rate can technically change at your lender’s discretion.  

Unlike regular mortgages, Home Equity Lines of Credit are reported to the credit bureau. So they can either help or hurt your credit score depending on how prudent you are with your payments.

Calculating a HELOC

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Up to 80% of your home equity minus what you owe on your mortgage can be accessed through your HELOC.

To see how this works, let us consider an example:

1. You purchased a house in 2005 for $400,000 with a mortgage of $380,000
2. After five years, the market price of your house increased to $500,000
3. Your current outstanding mortgage balance is $300,000
4. 80% of $500,000 (the market price) = $400,000
5. Your available line of credit is $400,000 – $300,000 = $100,000

So, you will continue to make fixed mortgage payments on the outstanding $300,000 mortgage, but you will have access to $100,000 of additional funds through a Home Equity Line of Credit at the available HELOC interest rate. The minimum HELOC payment is merely interest.

Comparing HELOC products

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A HELOC is a very accessible financial product in Canada with most banks offering one. Compare the different bank HELOC products in the chart below to find the one that meets your needs.

^{1 80% of market value or purchase price, whichever is lower}

^{2 Minimum HELOC value of $15,000 if customer also has an ING mortgage. If customer is applying for a HELOC only, the minimum amount is $50,000}

^{3 80% of home value can be accessed, as long as loan is below $850,000. For loans above $850,000, 75% of loan to value can be accessed up to a maximum HELOC value of $1.5M. In addition, mortgage + HELOC must not exceed $1.5M}

HELOC Features

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Minimum and maximum amounts

The minimum amount of a HELOC varies from bank to bank, with some institutions having none.  The maximum amount of a HELOC can usually be calculated as 80% of the current price of your property minus the outstanding mortgage to be paid.

Sub-divide lines

It is sometimes possible to divide up your HELOC into different portions through different subaccounts. 

An example of where this may be used is if you wanted to draw out equity to invest in the stock market. In this case, the interest you pay on borrowed money is tax deductible. So having a separate account makes it easier to track the money.

Option to convert to fixed

You can sometimes convert a portion of your outstanding borrowed HELOC funds to a fixed rate, which you will then pay like a standard mortgage.

Revolving balance

HELOCs are described as having a revolving balance, because borrowing multiple times within the account, for any amount up to the allowable credit limit, does not require writing a new loan document. The credit limit can also be increased as the equity in your home grows.

Second position HELOC

This means that you can hold your mortgage with one bank and get a Home Equity Line of Credit with another bank.

A HELOC is not necessarily a “second mortgage". A "first" or "second" mortgage is used to refer to the loan's claim position. A HELOC is often second position because there is another mortgage on the property at the time. However, it is possible to have a HELOC in first position. HELOCS usually have higher interest rates because it is assumed that they will be in second position, and as a result, are riskier to the lender. In the case of you defaulting, the lender in second position is not repaid until the first position lender is.