A home equity line of credit, or HELOC, is one of those terms many Canadians have probably heard of, but might not always be able to fully explain.
As someone who is considering applying for a HELOC or is in the process of home buying, it’s important to learn all you need to know about this type of credit and how it works. To help in this process, consider the following points:
A HELOC Explainer
A home equity line of credit is a secured form of credit. Lenders will use your home as a guarantee that you will pay back money that you owe. A home equity loan is secured against the equity you have built in your home, which you can access at a low interest rate. It’s also a revolving type of credit loan, which means you can borrow money, pay it back and then borrow it again.
The Two Types of HELOC Loans
There are two types of HELOCs: one that’s combined with a mortgage and another that is a stand-alone loan. Most major banks and financial institutions in Canada offer the HELOC plus mortgage; it also goes by the name of readvanceable mortgage. This type of HELOC does not typically include a specific amount to repay; instead, you will be required to pay interest on any funds you use. In most cases, homeowners will find that the credit limit on a HELOC in addition to their mortgage can be up to 65 percent of the home’s value.
So, if you’ve purchased a home for $500,000, the credit limit of your HELOC and mortgage would be $325,000. While the exact figures can vary depending on the interest rate and term of the mortgage, this gives you a good idea of how the HELOC amount is determined and how it can result in a generous loan amount. Meantime, a stand-alone HELOC, as its name suggests, is a home equity line of credit that’s not related to a mortgage.
Like the HELOC plus mortgage option, the stand-alone version can also go as high as 65 percent of your home’s purchase price or value. The stand-alone HELOC can also be used in place of a mortgage when you’re buying a home; this means you don’t have to pay off the principal and interest on a fixed schedule, but know there is usually a higher minimum down payment required.
How to Qualify for a HELOC
Homeowners and/or home buyers must qualify for the HELOC. This is a one-time process that, once the individual or family is approved, means they can access the home equity line of credit whenever needed. Requirements are a minimum down payment or equity in a home of 20 percent or more for the HELOC plus mortgage, or a minimum down payment or equity of 35 percent or more for the stand-alone HELOC. Applicants will also need to have a solid credit score, proof of income and an acceptable amount of debt in relation to their income.
Know the Rates
Know that HELOC rates will fluctuate over time. Thus, if you’re considering applying for either a HELOC with mortgage or stand-alone HELOC, it’s important to stay abreast of the latest rates, so that you can try to secure the lowest rates possible for you and your loan. For instance, check out any number of dependable resources like Rates.ca, which features an online calculator that allows visitors to see the current Canadian HELOC rates and hopefully save save some money in the process.
The Appeal of a HELOC
For homeowners who want to make some major home renovations or anticipate another large purchase, a HELOC can give them access to much-needed funds. Meantime, for those looking to buy a home, a HELOC can be an appealing option to a mortgage. Either way, learning as much as you can about the two types of HELOCs and knowing where to go for the most current rates is wise and certainly worth your time and attention.