Home Equity Line of Credit (HELOC)
What is a HELOC and how does it work?
What is the difference between home equity and home equity line of credit?
What is a HELOC used for?
How do you pay interest on a HELOC?
What’s the difference between a HELOC and refinancing?
How much money can I borrow on a home equity line of credit?
Is there a downside to having a HELOC?
A home equity line of credit, or HELOC, is a revolving line of credit secured by your home at a much lower interest rate than a traditional line of credit. In Canada, your HELOC cannot exceed 65% of your home’s value.
What you need to know about HELOCs in Canada
There are four key things you'll need to keep in mind when considering getting a mortgage with a home equity line of credit.
1. You can access up to 65% of your home's value
In Canada, you can access up to 65% of the value of your home through a home equity line of credit. However, it's also important to remember that your outstanding mortgage loan balance + your HELOC cannot equal more than 80% of the value of your home.
To determine how much equity is at your disposal, start by taking your home’s current market value and multiplying it by 80%. Next, subtract the balance of your mortgage. The remaining figure is how much you can access through a HELOC, so long as the amount is not worth more than 65% of the value of your home. To be sure, simply divide the HELOC amount by your home's market value.
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2. Your HELOC funds will be available through a revolving line of credit
With a home equity line of credit, the entire credit available is not advanced up front. Instead, you can use as much or as little of the HELOC as you choose, and you only pay interest on the amount you withdraw. Interest is calculated daily at a variable rate attached to Prime.
HELOC rates are traditionally higher than a variable mortgage rate but, unlike a variable mortgage rate, its relationship to Prime does not always stay the same. For example, a variable mortgage rate is often Prime +/- a number, like Prime – 0.35%. HELOC rates are set at Prime + a number, and your lender can technically change that number any time.
3. You make interest-only payments
If you are using any portion of your home equity line of credit, you will need to make a monthly payment for doing so. The same way a traditional line of credit works, you will only need to pay the interest on your outstanding balance and that amount is automatically taken out of your bank account on the same day each month.
To pay off the balance in full, you will need to be more disciplined and make extra payments at your own discretion. And remember: unlike a refinance, you do not need to break your existing mortgage when considering a HELOC. Therefore, you won’t need to pay a mortgage penalty – just a monthly interest-only payment.
4. Your HELOC interest rate is impacted by the Bank of Canada
HELOC rates are a type of variable-rate debt, meaning they’re influenced by the benchmark Overnight Lending Rate set by the Bank of Canada, which lenders use to set their Prime rates. Like variable-rate mortgages, your HELOC rate will change whenever the central bank hikes or cuts interest rates. This has been the case between January 2022 to March 2023, when the Bank of Canada increased its rate by a historic eight times. As a result, the Prime rate used by lenders rose from 2.45% to 6.7% within the space of 12 months, which has directly impacted the amount of interest paid by HELOC borrowers.
HELOC rates vs. the Overnight Lending Rate
Bank prime rates
- Tangerine Prime Rate
- TD Bank Prime Rate
- Scotiabank Prime Rate
- HSBC Prime Rate
- Bank of Montreal Prime Rate
- CIBC Prime Rate
- RBC Royal Bank Prime Rate