Home Equity Line of Credit (HELOC)
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September 5, 2018

Home Equity Line of Credit (HELOC)

HELOC is the acronym for home equity line of credit. Financial institutions use your home to secure this revolving line of credit at a substantially lower interest rate than a conventional line of credit. An HELOC cannot surpass 65 percent of the value of your home.

What Canadians Should Know About HELOCs

You have access to 65 percent of the value of your home

You have access to 65 percent of the value of your home if you opt for a home equity line of credit in Canada. It’s also important to keep in mind that when you add the HELOC to the unpaid balance on your mortgage loan the total cannot equal more than 80 percent of the value of your home.

It’s easy to figure out how much equity you have at your disposal. First, take the current market value of your home and multiply it by 80 percent.

Next, subtract the unpaid balance of your mortgage. The difference is how much you can borrow via an HELOC – as long as the amount is not more than 65 percent of the value of your home. You can just divide the HELOC amount by the market value of your home if you want to be absolutely sure.

Funds that you borrow via HELOC will be available as a revolving line of credit

Your financial institution will not advance the funds you borrow via HELOC upfront. Instead, once the HELOC is approved, you can access the funds whenever you choose, and pay interest only on the amount you withdraw. The bank will calculate interest daily using a variable rate linked to Prime. Unlike a variable mortgage rate,

The bank will calculate interest daily using a variable rate linked to Prime. Unlike a variable mortgage rate, an HELOC’s relationship to Prime does not always remain the same. For instance, a variable mortgage rate is often Prime +/- a number, such as Prime – 0.35%.

HELOC rates are set at Prime + (not minus) a number, and theoretically, your lender can adjust that number at any time. HELOC rates are usually higher than variable mortgage rates.

You make payments on the interest only

You will need to pay monthly installments if you are using any portion of your HELOC. You will only be required to pay the interest on your outstanding balance and the bank takes that amount out of your account on the same day of each month, similar to the procedure used for a regular line of credit.

You will need to practice some self-control and make additional payments at your own discretion if you want to settle the remainder in full. There’s no need to break your current mortgage if you’re thinking about getting an HELOC (unlike a refinance). You, therefore, will not need to pay a mortgage penalty – only the monthly interest-only payment.

You will need to practice some self-control and make additional payments at your own discretion if you want to settle the remainder in full. There’s no need to break your current mortgage if you’re thinking about getting an HELOC (unlike a refinance). You, therefore, will not need to pay a mortgage penalty – only the monthly interest-only payment.

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