Insights and tips on home equity lines of credit
Home equity line of credit FAQs
How does a home equity line of credit work?
A HELOC is a loan secured against the equity in your home. By using your home as collateral, the line of credit can be quite a large amount, and interest rates are typically a lot lower than with a personal loan or credit cards.
Depending on the lender, you can usually borrow up to 80% of your home’s value (minus what you owe on your mortgage and any other loans secured against it) or up to 65% of the home’s value if you have no mortgage and are borrowing from a bank.
Once your credit limit has been set, you can withdraw money from it at any time, for any reason. Similar to how a credit card works, any amounts that you pay back into your HELOC are immediately available again for you to withdraw (though HELOCs typically offer considerably lower interest rates than credit cards).
How much interest will I pay on a HELOC?
Interest rates for home equity lines of credit are based on the Bank of Canada prime rate, which can go up and down. Lenders typically offer a rate that is prime plus a certain amount, for example, prime plus 0.5%. In this case, if prime were 5%, the HELOC rate would be 5.5%.
Whenever the Bank of Canada raises or lowers its prime rate (for example, to reduce inflation or to boost the economy) lenders typically lower or raise their HELOC rates accordingly. The interest rate is one of the biggest advantages of a HELOC; it is usually considerably lower than other personal loan and credit card interest rates.
How do I qualify for a home equity line of credit?
While the maximum possible amount of your HELOC depends on your home’s value and current mortgage balance, you would also have to qualify according to your income. Lenders use calculations called debt service ratios to work out how much they will lend you.
These ratios take into account your gross income minus your mortgage and other home costs, as well as your other loan obligations. They will also take into account your credit score; a high credit score would usually mean you would qualify with the best possible interest rate. A low credit score could mean you either wouldn’t qualify for a HELOC or you might be offered one with a higher interest rate.
What can I use funds from a HELOC for?
Another significant advantage of a HELOC is that, once it’s approved, you can withdraw money from it at any time, for any reason. A HELOC can provide access to a substantial amount of money (some people have home equity lines of credit limits in the hundreds of thousands of dollars) and its interest rate is typically considerably lower than some other types of loans. People therefore use HELOCs for many reasons, including:
- Carrying out home renovations (especially useful as you can draw funds as and when necessary).
- Paying for a special occasion, such as a wedding.
- Using it to pay for emergency expenses, such as a broken boiler, new windows or a new roof.
- Consolidating high-interest debt; paying off credit card balances with a HELOC can save you a fortune in interest and boost your cash flow.
- Putting it towards a down payment so your children can buy their first home.
- Paying for your children’s tuition expenses.
Mortgages are offered by Investors Group Trust Co. Ltd., a federally regulated trust company, and brokered by nesto Inc. Licences: Mortgage Brokerage Ontario #13044, Saskatchewan #316917, New Brunswick #180045101, Nova Scotia #202507230; Mortgage Brokerage Firm Quebec #605058; British Columbia, Alberta, Manitoba, Newfoundland/Labrador, PEI, Yukon, Nunavut, Northwest Territories.
*In Ontario, a mortgage agent, and in New Brunswick and Nova Scotia, a mortgage broker or a mortgage associate.
*In Quebec, a mutual fund representative.
Mortgage advisors are licensed professionals and equivalent to the following titles per province: Sub Mortgage Broker/Mortgage Broker in British Columbia, Mortgage Associate/Mortgage Broker in Alberta, Associate/Mortgage Broker in Saskatchewan, Salesperson/Authorized Official in Manitoba, Mortgage Agent/Mortgage Broker in Ontario, Mortgage Broker in Quebec, Mortgage Associate/Mortgage Broker in New Brunswick, Associate Mortgage Broker/Mortgage Broker in Nova Scotia, or Mortgage Broker in Newfoundland & Labrador.