What is a HELOC or Home Equity Line of Credit?
A home equity line of credit (HELOC) is a type of revolving line of credit that allows you to access cash from home equity. By taking out a mortgage with a HELOC feature, you’ll have access to a pre-approved amount of cash within your mortgage.
Keep in mind, when you use the money from a HELOC, you’ll have to pay interest on it on top of your regular mortgage payments.
A home equity line of credit (HELOC) is a revolving line of credit secured by your home, usually at a lower rate than a traditional line of credit. In Canada, your HELOC cannot exceed 65% of your home’s value.
Important things to know about HELOCSs in Canada
You’ll need to keep these three things 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
You can access up to 65% of the value of your home through a home equity line of credit—but there are limits. 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, first multiply the current market value of your home by 80%. Next, subtract the balance of your mortgage.
The remaining figure is how much you can access through a HELOC, provided that 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.
#2 – Your HELOC funds will be available to you via a revolving line of credit
With a home equity line of credit, you don’t need to borrow the entire amount up front. You can borrow as much or as little as you choose, and you’ll only pay interest on the amount you withdraw. Interest is calculated daily at a variable rate attached to Prime.
HELOC interest rates tend to be more expensive than a variable mortgage rate, but unlike a variable mortgage rate, their relationship with Prime does not always stay the same.
For example, a variable mortgage interest rate is often Prime +/- a number, like Prime – 0.35%. HELOC interest rates are set at Prime + a fixed number. Your lender can technically change that number at any time.
#3 – You only pay the interest with a HELOC
If you’re taking out any portion of your home equity line of credit, you’ll need to make monthly payments. The same way a traditional line of credit works, you’ll only need to pay the interest on your outstanding balance, and that amount is automatically withdrawn from your bank account on the same day each month.
To pay off your loan in full, be more disciplined and make extra payments when you can afford to. 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.
How do you pay the interest on a HELOC?
With a home equity line of credit (HELOC) mortgage, you have the freedom to use as much or as little of the credit line as you choose, and you only pay interest on the amount you have drawn out.
Interest is calculated daily and changes monthly at a variable rate attached to a Prime index. Because HELOC rates are often higher than variable mortgage rates, the relationship to Prime can technically change any time at the discretion of your lender.
For example, a variable mortgage rate is often Prime + a fixed number, like Prime + 0.35%. A HELOC rate, however, can be set at Prime + a fixed number and your lender can technically change that number any time.
Learn more about a Home Equity Line of Credit
If you’re thinking of accessing the equity in your home, or are curious about how much equity you currently have, reach out today to get the conversation started. My team and I can assess your personal situation at no cost to you and help you understand what your options are. If you’re ready to set up a HELOC or second mortgage then I can also find you the best deals and guide you through the process.
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