Home Equity Line of Credit
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 like a credit card or loan. In Canada, your HELOC cannot exceed 65% of your home’s value.
The Three Things You Need to Know About HELOCs in Canada
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 available for you to draw from your HELOC, 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 does not equal more than 65% of the market value of your home.
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 as a lump sum. Instead, you can draw from the line of credit similar to a credit card. You use as little or as much as you want, up to your limit. The interest rate of the HELOC is typically much lower than a traditional line of credit but higher than a variable mortgage rate, with the rate tied to Prime. HELOC rates are set at Prime + a number that is set by your lender.
3. You make interest-only payments
Similar to a traditional line of credit or credit card, you must make payments for any withdrawals made but interest-only payments. To pay off the balance of a home equity line of credit, you will need to make extra payments at your own discretion. Unlike refinancing, you don’t need to pay a prepayment penalty to get a home equity line of credit on your home, since the HELOC functions as a second mortgage that goes behind your existing mortgage.