What is a Home Equity Line of Credit?
A home equity line of credit, or HELOC, is essentially a hybrid of a personal line of credit and a second mortgage.
With a HELOC, you can borrow money by using equity in your home. It is a revolving line of credit secured by your home.
This kind of loan can be very helpful because you can use the money for anything, such as making repairs or buying another property.
Who is a Home Equity Line of Credit for?
To secure the best terms, it is suggested that buyers meet a few conditions:
- A good credit score
- A steady income
- Reasonable total debt service ratio
How does a Home Equity Line of Credit work?
Home equity is essentially the difference between the market value of your property and the mortgage balance.
For example, if your mortgage is $200,000 and your home is worth $400,000, you have $200,000 in home equity.
To qualify for a HELOC in Canada, you must apply to a bank or other financial institution.
The more home equity you have, the more you can borrow with a home equity line of credit. Oftentimes, as you pay off your mortgage or as the value of your property rises, your home equity grows over time.
If you borrow from a federally authorized financial institution, like a bank, your HELOC in Canada can be up to 65% of your home’s appraised value. It can also be up to 80% of the value of your property if your lender combines the maximum of your home equity line of credit with the amount still owed on your mortgage. As the prime rate changes, so does the interest rate.
HELOC administrative fees could include:
- appraisal fees
- title search fees
- title insurance fees
- legal fees
Payments: In Canada, a HELOC is a revolving line of credit. To pay off the balance, you must make monthly interest payments as well as principal payments.
What are the advantages?
- Easy access to cash. Utilize the funds for anything you want, like buying a rental property, consolidating debt, or retirement savings.
- Low interest rates. In comparison to credit card rates, HELOC interest rates are often low.
- Interest-only payments. As only interest is required to be repaid, you can better manage your finances.
- Easy to make extra payments. Prepayments incur no fees or penalties.
- Borrow what you need. This loan is not a one-time payment. Borrow whenever you need money.
- Keep your home and your equity: Continue living in your home, and maintain ownership and control of your property, which is an asset that will generally continue appreciating in value
What are the disadvantages?
Repayment requires discipline.
If your loan requires interest-only payments as its minimum, you’ll need to consciously make extra payments to get it paid off faster.
Quick cash access.
In some cases, the sum for which you are approved can be quite large and serve as an incentive to make larger purchases.
Changing lenders can be hard
Before switching lenders, you may need to pay off your HELOC in full.
You could risk losing your home
If you don’t make your payments, your lender might seize your house.
Minimum qualifications
In Canada, HELOC mortgages are only available to borrowers who make enough money each month to cover at least the interest. As a result, even with significant home equity, borrowers with low incomes (such as retirees) may not be eligible.
The bank could reevaluate your loan
Even if you were approved for a HELOC in the past, the bank is entitled to reevaluate your credit and reduce your borrowing limit at any time. If they notice that your credit score is dropping, they may even demand that you pay the remaining balance right away.
Penalties for late or missed payments
A missed or late payment may result in your loan being called due.
Extra fees
A home equity line of credit (HELOC) may require you to pay for things like an appraisal, an application, and legal services.
Possible increase in interest rates
If the prime interest rate rises, your HELOC interest rate will rise.
Risk of overspending
A HELOC makes it easier to access funds. Misusing it can lead to debt and asset depletion.
What do I need to get started?
These may include:
- Home renovations
- Vehicle purchase
- Elective medical expenses
- Education expenses, including tuition and housing
- Home renovations
- Investment opportunities
- Debt consolidation
- Other major purchases
- Residential property
If yes, a HELOC may be the solution you require.
Let’s get together and analyze your file. We’ll help you find a solution that’s aligned with your budget, your timelines, and your plans
