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Home equity line of credit (HELOC) features

All home equity lines of credit are different, so it's important to consider the features of any HELOC that you’re considering taking out. Below 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, and some institutions may not offer the product at all. The maximum HELOC amount is calculated as 65% loan-to-value of your home, as shown in the sample calculations below.
• 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 if your HELOC is combined with your mortgage (see the following section, Types of HELOCs, for more details).
• 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.

Types of home equity line of credit (HELOC)

Home equity line of credit (HELOC) combined with a mortgage

This product, sometimes called a readvanceable mortgage, is offered by most major financial institutions in Canada. It is a combination of a HELOC and a fixed-rate mortgage. Some of the key features of this type of HELOC are: 

• You typically do not have fixed repayment amounts on your HELOC - you only have to pay interest on the money you’ve used. 
• You will have to pay regular, fixed payments on your mortgage as stipulated in your contract. 
• The credit limit on your HELOC is up to 65% of your home’s market value. As you build equity in your home by paying off the principal, the credit limit will increase proportionately. 

Stand-alone home equity line of credit (HELOC)

A stand-alone HELOC is not related to your mortgage; it’s simply a revolving line of credit guaranteed by your home. Key features of a stand-alone HELOC include: 

• The credit limit can be up to 65% of your home’s market value
• Unlike a HELOC combined with a mortgage, the credit limit of a stand-alone HELOC does not increase as you pay off the principal of the loan.

 

How do you qualify for a home equity line of credit (HELOC)? 

Among the most attractive features of a HELOC is that you only have to qualify and be approved for a HELOC once. Then, you can use the funds in your HELOC any time you choose. In order to qualify, you’ll need the following: 

•  A minimum down payment or equity in your home of at least 20%
• A good credit score – You would need a credit score of at least 680 to qualify for the best rates, and at least 600 to qualify at all for a HELOC from a regular lender (as opposed to a sub-prime lender, who will charge higher rates)
• Proof of income – You’ll need to demonstrate proof of income in the form of pay stubs and/or tax documents such as your Notice of Assessment
• An acceptable debt-to-income ratio – This varies from lender to lender, but the general range is 40-50%. 
• Proof that you own your home 
• All necessary mortgage details, including the balance, term and amortization period
  

In addition to the above, you’ll also need to pass a stress test, much like you would when trying to obtain a mortgage. You’ll be stress tested at either the qualifying rate of 5.25% set by the Office of the Superintendent of Financial Institutions (OSFI), or your contract rate + 2%, whichever is higher.

 

What are the pros and cons of a home equity line of credit (HELOC)?

Like any financial product, a HELOC comes with both pros and cons, some of the most important of which are laid out below.

Pros:

• Relatively easy access to a large amount of credit
• Lower interest rates than other types of credit, such as credit cards
• You only pay interest on the amount that you actually use (not the entire amount available to you)
• You can pay back the entire balance at any time without incurring a pre-payment penalty fee
• It’s a flexible line of credit with no set repayment schedule 

Cons: 

• You have to be disciplined in terms of repaying the loan, because there is no set repayment schedule – otherwise you could find yourself in a lot of debt for a long time
• A HELOC has a variable interest rate, meaning that it fluctuates along with your lender’s prime rate; should the Bank of Canada choose to raise the target for the overnight rate, your HELOC interest rate will rise accordingly
• You may not be able to switch your mortgage to another lender unless you have paid your HELOC off in full
• If you are unable to make payments on your HELOC even after negotiating with your lender, since it is a loan guaranteed by your home, your lender can take possession of your home

 

Tips to consider before getting a home equity line of credit (HELOC)

Because of the flexibility of a HELOC, you need to be disciplined about how you handle the money you can access through this product. To avoid getting into trouble down the road, it’s helpful to consider the following before getting a HELOC. 

• Do you really need a HELOC? You might be able to achieve your goals by being more economical and building up your savings. 
• Do you have a clear plan of how you intend to use the credit you’ll be able to access with a HELOC?
• Do you have a budget for how you intend to use the money you can access with a HELOC? This will help you determine the credit limit that you actually need. 
• Have you shopped around for the right lender? Have you negotiated to make sure you are getting the product that you want? 
• Have you made a repayment plan? As mentioned, the flexibility of a HELOC can get you into trouble if you aren’t careful.
  
  

Transferring your home equity line of credit (HELOC)

At the end of your mortgage term, when you are getting ready to renew, you may want to go with a different mortgage provider, in which case you would want to transfer your mortgage and your HELOC. Not all lenders will allow you to switch without paying off your HELOC – you’ll want to review your contract and consult with your lender to see if this is an option for you.

If you are allowed to transfer your HELOC, you’ll almost certainly have to pay a number of legal and administrative fees. These will vary from lender to lender.

 

Is a home equity line of credit (HELOC) right for you? 

As with any other major financial decision, before you take out a HELOC, think about your financial needs and your current situation. A HELOC is a great option if you want flexibility and think you may be able to pay it off early. For example, if you're obtaining a HELOC to perform renovations on your home prior to selling it, the value added to your home outweighs the amount you will have to pay in interest on the HELOC.

Because of its flexibility and low monthly payments, a HELOC may be a better choice than a conventional loan in some situations. For example, for many parents in Canada, obtaining a HELOC is a useful vehicle to assist their children in making a down payment on a first home.

If you're unsure as to whether getting a HELOC is the right choice for you, it helps to speak with a mortgage broker, who can give you expert, personalized advice for free. 

 

How much home equity line of credit (HELOC) can I get?

How to calculate your maximum home equity line of credit

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:

Case study: Henry's HELOC

• Home value: $600,000
• Mortgage balance: $300,000

The first step is to calculate the maximum loan-to-value (LTV) ratio. To do this, Henry needs to multiply his home value by 80%, in keeping with the guidelines mentioned above. So, in this example, it would be: 

$600,000 (home value) x 0.8 (80%) = $480,000 (maximum LTV amount)

The next step is to calculate the maximum amount of equity Henry can pull from his home. To do that, Henry needs to subtract his mortgage balance from the maximum LTV amount that he just calculated above. So here, it would be: 

$480,000 (maximum LTV amount) - $300,000 (mortgage balance) = $180,000 (maximum allowable HELOC)

Finally, Henry wants to make sure that $180,000 doesn't exceed 65% of his home's value, per OSFI's guidelines. For this last calculation, he simply has to divide the HELOC amount by the value of his home: 

$180,000 (maximum allowable HELOC) ÷ $600,000 (home value) = 0.3 (30%)

In this example, Henry can access $180,000 through a HELOC, as it only equals 30% of his home's value and is thus well under the 65% maximum allowable amount permitted by OSFI. 

Comparing home equity line of credit (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. Please note that while we have only included a selection of HELOC products offered by the Big Banks, many other lenders offer HELOCs as well. Make sure to shop around to obtain the best rate on your HELOC. A description of the compared features can be found under the table.