Did you know that in 2020, 17% of Canadian homeowners had a mortgage and a home equity line of credit (HELOC), up from 14% in 2019? During that period, the average credit limit for a HELOC in Canada was $152,000 with only $59,000 as the average amount used. If you need access to financing, have you considered a home equity line of credit?
A home equity line of credit, or HELOC, is a re-advanceable mortgage. This means you can borrow, pay it back, and continuously borrow without going back to the bank each time. To be clear, a HELOC is indeed a mortgage. This means that the loan is done against your home. If and when you sell your home, that loan (or lien) still needs to be paid first just like a mortgage would be.
Some key differences between a HELOC and a second mortgage or personal line of credit are:
- HELOCs are a revolving line of credit that allows homeowners to borrow up to a pre-determined limit as needed.
- HELOCs have variable interest rates that may change over time but they often have lower initial rates than second mortgages.
- HELOCs typically have a higher limit since it’s relative to your home equity (instead of borrowing capacity as an individual).
- HELOCs can still be used as a down payment on a property and will never be allowed to go over 65% of the value of the home
For example, if you had $50K on a personal line of credit, we would calculate a payment at 3% ($1,500/month). If you had the same $50K on a HELOC, we would calculate a payment similar to a mortgage where it would be the actual interest rate (prime plus one) and a stress test of two percent amortized over 25 years, effectively equalling a payment of about $475/month which significantly reduces the impact on your borrowing.
A home equity line of credit (HELOC) is a revolving line of credit that is secured by your home. It works like a credit card, where you have a credit limit and can borrow and repay funds as needed. Here are some examples of when you might want a HELOC:
- Home improvements: If you are planning to make home improvements over time and don’t have all the funds upfront, a HELOC can be a good option as you can draw funds from the line of credit as needed and pay interest only on the amount borrowed.
- Emergency fund: A HELOC can also serve as a backup emergency fund if unexpected expenses arise, you can draw on the line of credit to cover them which can be a useful tool in case of a job loss or other financial hardship.
- Education expenses: If you or a family member is planning to pursue higher education, a HELOC can be a way to pay for tuition and other expenses as the interest on a HELOC is typically lower than on other types of loans, making it a cost-effective way to finance education.
- Consolidating high-interest debt: A HELOC can also be used to consolidate high-interest debt (such as credit card balances or personal loans) allowing you can save money on interest and simplify your payments.
As always, it’s important to carefully consider the costs and risks associated with a HELOC. You’ll want to make sure you understand the terms and fees associated with the line of credit and that you can afford the payments, as it is secured by your home. Make sure to consult with a financial or mortgage professional — like us! — before taking on any new debt.
Contact the Kyle Miller Mortgage Agent team today! We’ll carefully evaluate the costs and benefits of refinancing your mortgage and shop around to find the best deal for your situation.
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