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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As per the Office of the Superintendent of Financial Institutions (OSFI), a HELOC can access up to 65 per cent of the value of your home. However, when pooled together with a mortgage, the total combined debt must not exceed a loan-to-value ratio of 80 per cent.

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

1. The value of your home is $100,000
2. You have 20 per cent equity in the home ($20,000)
3. The maximum home loan combination (mortgage and HELOC) you would be approved for is $80,000 (80 per cent loan-to-value)
4. However, the home equity line of credit portion would be capped at $65,000 (65 per cent loan-to-value)
5. The remaining $15,000 must be in the form of a mortgage loan

The minimum payment for the line of credit portion is merely the 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 65% 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 ING DIRECT will switch to the federally mandated 65 per cent loan-to-value ratio by December 31, 2012.}

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 HELOC amount is calculated as 80 per cent loan-to-value of your home, however, the line of credit portion of the HELOC is limited at 65 per cent loan-to-value.

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.