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Jamie David, Business Director Mortgages
A home equity line of credit (HELOC) is one of the best ways to access the equity you’ve built up in your home. It’s a low cost alternative to other lines of credit like credit cards or personal loans, backed by the equity you've built in your home. Despite the benefits, it’s important to know some details about HELOCs before you decide to take one out.
What is a HELOC?
A home equity line of credit (HELOC) is a revolving line of credit that is secured by the equity that you've built up in your home. A HELOC allows you to borrow against that equity at a much lower interest rate than a traditional line of credit. By taking out a mortgage with a HELOC feature, you’ll have access to a pre-approved amount of cash within your mortgage. When you use the money from a HELOC, you’ll have to pay the interest on it on top of your regular mortgage payments.
What is home equity?
Home equity is the current market value of your home minus the remaining balance of your mortgage. Essentially, it's the amount of ownership of a property you have built up through both appreciation as well as reductions in the mortgage principle made through your mortgage payments. So, as you pay off your mortgage and build equity in your home, a HELOC gives you the ability to reborrow a portion of these funds.
What is a HELOC used for?
You can use HELOC funds at your discretion for renovations, debt consolidation, higher education or anything else you need. Just remember that the HELOC is secured by your home and cannot exceed 65% of your home's value.
How do you pay interest on a HELOC?
With a HELOC mortgage, the entire line of credit available is not advanced upfront. Rather, you have the freedom to use as much or as little of the HELOC as you choose, and you only pay interest on the amount you have withdrawn.
Interest is calculated daily at a variable rate attached to Prime. However, HELOC rates are often higher than variable mortgage rates, and the relationship to Prime can technically change anytime at the discretion of your lender.
For example, a variable mortgage rate is often Prime +/- a number, like Prime – 0.35%. HELOC rates, however, are set at Prime + a number and your lender can technically change that number anytime.
Calculating a Home Equity Line of Credit (HELOC)
As per the Office of the Superintendent of Financial Institutions (OSFI), a HELOC can give you access to no more than 65% of the value of your home. It's also important to remember that your mortgage loan balance + your HELOC cannot equal more than 80% of your home's value.
To see how this works, let's look at an example:
The maximum amount of equity you could pull from your home through a HELOC is $105,000.
Now, you still need to make sure that $105,000 doesn't exceed 65% of your home's value. To be sure, simply divide the HELOC amount by the value of your home:
In this example, you could access $105,000 through a HELOC, as it only amounts to 30% of your home's value.
Comparing HELOC Products
As well as the rate of a HELOC, you'll also need to consider the features of any product you're considering. You can compare the different HELOC products in the chart below to find one that suits your needs. A description of the compared features can be found under the table.
|HELOC||Minimum amount||Maximum amount (line of credit portion)||Sub-divide lines||Option to convert to fixed||Revolving /re-advancable balance||Monthly fee||Second position|
|BMO Homeowner ReadiLine||None||65% market value||No||No||Yes||No||No|
|CIBC Home Power||$10,000||65% market value||No||No||Yes||No||No|
|Desjardins Versatile Line of Credit||$25,000||65% market value||No||No||2.49%||No||No|
|ING DIRECT Canada HELOC||$15,000 or $50,000||65% market value||No||Yes||No||No||No|
|Manulife One||$50,000||65% market value||15||Yes||Yes||Yes||Yes|
|National Bank All-in-One||$25,000||65% market value||99||Yes||Yes||Yes||No|
|PC Financial Secured Borrowing Account||$15,000||65% market value||No||No||Yes||No||No|
|RBC Homeline Plan||$5,000||65% market value||5||Yes||Yes||No||No|
|Scotiabank STEP||None||65% market value||No||No||Yes||No||No|
|TD Canada Trust HELOC||$10,000||65% of market value or purchase price||20||Yes||Yes||No||Yes|
All home equity lines of credit are different, and you always need to check the features of any HELOC that you’re considering taking out. Here are some of the features that can differ between different HELOC products.
Minimum and maximum amounts: The minimum amount of a HELOC varies from bank-to-bank, with some institutions not offering the product at all. The maximum HELOC amount is calculated as 65% loan-to-value of your home, as seen in the example calculation above.
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.
Sub-divide lines: It is sometimes possible to divide up your HELOC into smaller portions through different sub-accounts. 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.
Second position HELOC: This means that you can hold your mortgage with one bank and get a HELOC 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.
References and Notes
- 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.
- 65% of market value or purchase price, whichever is lower.
Jamie David is the Business Director of Mortgages at Ratehub.ca. A graduate of the Systems Design Engineering program at the University of Waterloo, she has over 15 years of business, marketing, and engineering experience in the financial technology, banking, education, energy and retail industries. She has worked in top organizations like TD Bank, Trading Pursuits, Petro-Canada, and the TTC. Her passion for personal finance, investing, education, and business strategy brought her to Ratehub.ca where she heads a very talented, cross-functional team that is dedicated to providing Canadians with the best mortgage experience all the way through from online search to (keys-in-your-hand) funded mortgage.
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