Home Equity Line of Credit (HELOC) in Canada

A home equity line of credit allows homeowners to take out the home equity they’ve built up. It offers the flexibility of a revolving line of credit and lower interest rates than other financing options like credit cards or personal loans.

What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) is a secured form of revolving credit that uses your home equity as collateral. It provides ongoing access to funds up to a set borrowing limit.

You can draw against your available credit as needed instead of taking the full amount as a lump sum. It works similarly to a credit card, except the interest rate is typically much lower since it is a secured loan backed by your home equity.

You can use the funds for any purpose, including home renovations and repairs, consolidating higher-interest debt, major purchases like automobiles, college or education expenses, medical bills, etc.

How Do HELOCs Work in Canada?

A HELOC functions similarly to a credit card, providing a pre-approved credit limit based on your home equity. Here’s how it works:

1. Application: You apply with a lender who will assess your home equity, credit score, income, and debt levels to determine your eligibility and credit limit.
2. Credit limit: Once approved, you’ll have access to a revolving credit up to your approved limit. Your credit limit is typically a percentage of your home’s appraised value minus any outstanding mortgage balance.
3. Accessing funds: You can borrow as needed, up to your credit limit, using methods like checks, online transfers, or a linked credit card.
4. Interest payments: During the draw period, you’re only required to make monthly interest payments on the outstanding balance, although you can choose to pay down the principal as well.
5. Revolving credit: As you repay the borrowed funds, your available credit increases, allowing you to borrow again without reapplying.

What Types of HELOCs Available in Canada?

There are two main types of HELOCs in Canada:

HELOC Combined with a Mortgage

• Combines a revolving HELOC with a fixed-term mortgage under a single credit limit
• Credit limit increases as you pay down your mortgage principal
• Lenders may allow you to set up sub-accounts within the HELOC for different credit products (e.g., personal loans, credit cards)

Stand-alone HELOC

• A revolving credit product secured by your home, independent of your mortgage
• Credit limit does not automatically increase as you pay down your mortgage principal
• Can be used as a substitute for a traditional mortgage with a higher minimum equity requirement (at least 35%)

How Much Can You Borrow with a HELOC in Canada?

The amount you can borrow depends on your home equity and the lender’s policies:

• Stand-alone HELOC: Up to 65% of your home’s appraised value
• HELOC Combined with a Mortgage: Up to 80% of your home’s value, above 65% must be on a fixed-term mortgage.

For example, if your home is appraised at $500,000 and you have a remaining mortgage balance of $200,000:

• Stand-alone HELOC: You could access up to $325,000 (65% of $500,000)
• Combined HELOC and Mortgage: You could access up to $400,000 (80% of $500,000), minus your $200,000 mortgage balance, for a total of $200,000

The more equity you have, the more you can borrow at competitive rates. Some lenders may be willing to exceed 80% combined borrowing, but this usually involves paying higher interest rates.

How to Qualify for a HELOC in Canada?

To qualify for a HELOC in Canada, you typically need:

• A minimum of 20% equity in your home (35% if using a stand-alone HELOC as a mortgage substitute)
• A good credit score (usually 650 or higher)
• Sufficient and stable income
• An acceptable debt-to-income ratio
• Proof of homeownership and mortgage details (if applicable)

Federally regulated banks also require borrowers to pass a mortgage stress test, which assesses their ability to make payments at a qualifying interest rate (typically higher than their actual rate).

Credit unions and other non-federally regulated lenders may choose to use the mortgage stress test but are not required to do so.

If you already own your home and want to use your equity for a HELOC, you’ll also need to:

• Provide proof of ownership
• Supply your current mortgage details (balance, term, amortization period)
• Have your lender assess your home’s current value

A lawyer (or notary in Québec) or a title service company will be required to register your home as collateral. Your lender will provide more details on this process.

What Are the Benefits of Getting a HELOC?

HELOCs offer 7 benefits that make them attractive financing options for homeowners.

• Lower interest rates – Average 3-5%, significantly lower than most unsecured loans or credit cards.
• Ongoing flexibility to access more funds up to your limit as needed.
• Pay interest only on what you utilize, not the full amount borrowed. This keeps payments lower.
• No prepayment penalties – Can repay principal in full or in part at any time.
• Tax-deductible interest (if used for investment purposes).
• Increasing credit limit – As the mortgage principal is paid down, your limit rises accordingly.
• Consolidate higher-interest debts – Can provide a lower-cost way to pay off credit cards, personal loans, etc.

What Are the Risks Associated with HELOCs?

While HELOCs can provide affordable access to cash, they also come with 5 inherent risks to consider:

• Overspending: Having a large available credit limit could tempt some borrowers to overspend or use funds for unnecessary purchases
• Payment Shock: Since the interest rates are variable, sudden spikes in the prime rate can dramatically increase your monthly payments.
• Prepayment Penalties: Converting the balance to a fixed-rate loan in the future often incurs early repayment penalties. Factor this into your total costs.
• Credit Score Impacts: Carrying high balances on open HELOC credit limits may hurt your credit score, making it harder to qualify for other loans.
• Foreclosure Risk: If you fall too far behind on payments, your lender can call the loan and force the sale of your home to recover the amounts owed.

While the risks are minimal with careful borrowing and money management, they have potential downsides. The flexibility and convenience come with the responsibility to use funds wisely.

Comparing HELOC Providers in Canada

All major Canadian banks offer home equity lines of credit, often bundled with mortgages. Here is an overview comparing the key features and options offered by top providers:

Lender	Readvancing	Debit Card Access	Minimum Limit
RBC Homeline Plan	Yes	No	$5,000
BMO ReadiLine	Yes	No	$5,000
TD FlexLine	Yes	Yes	None
Scotiabank Total Equity Plan (STEP)	Yes	Yes	$10,000
CIBC Home Power Plan	Yes	No	$10,000
National Bank All-In-One	Yes	Yes	None
Tangerine HELOC	No	No	None

Bundled mortgage: Option to combine with a mortgage for a higher total lending limit.

Readvancing: Credit limit automatically increases as mortgage principal is paid down.

Debit card access: Allows using funds directly via debit card.

How Much Does a HELOC Cost?

HELOCs provide inexpensive borrowing compared to alternatives like credit cards and personal loans. However, there are still costs and fees when getting them.

HELOC Rates

The rate on a HELOC is variable, not fixed. It is tied directly to the lender’s prime rate. This means your interest rate and monthly payments fluctuate up or down as the prime rate changes.

The HELOC rates in Canada are far below the double-digit interest rates charged for most credit cards and unsecured personal loans.

However, the risk with a variable rate is payment shock if interest rates rise rapidly. Today’s low interest rate environment makes this less of a concern in the near term. However, variable rates can and do change.

HELOC Fees

When applying for and setting up a HELOC, you’ll also incur various fees such as:

• Appraisal fee – $200 – $500 to assess your home value.
• Application or origination fee – 1% to 3% of your credit limit.
• Legal fees – $500+ to prepare and register collateral charge documents.
• Title search – $150+ to review property title and confirm ownership.
• Prepayment penalties – If converting to a fixed rate loan later on.
• Mortgage default insurance – If your down payment is less than 20% of home value.

These fees often total $1,500 – $3,000. However, some lenders offer promotions periodically to waive certain costs.

How Do You Repay a HELOC?

You can have an interest-only draw period for up to 10 years, during which you pay only the monthly interest charges. After the draw period ends, principal payments kick in, too.

Here are 7 keys to managing repayments:

• Make at least the minimum monthly interest payment – Required to keep the account in good standing.
• Pay down the principal aggressively – Don’t prolong accumulating interest by paying only the minimum.
• Stick to your repayment strategy – Follow the payoff schedule you committed to.
• Consider locking in your rate – You can convert to a fixed rate later on if rates seem likely to rise.
• Reflect payments as soon as possible – Ensure you get credit for any extra principal payments right away.
• Watch for rate change notices – Prime rate changes mean your rate and payment adjust, too.
• Never miss payments – Late or skipped payments can trigger your HELOC to be called in full.

Repaying only the minimum interest will cause balances to balloon over time. Plan to repay all withdrawn principal within the draw period before rates potentially reset higher.

HELOC vs Mortgage Refinance

While both HELOCs and mortgage refinancing allow you to access your home equity, they have 4 key differences:

HELOCs	Refinance
Flexible access to funds	One-time lump sum
Variable Rates	Fixed or variable
Lower upfront costs	Higher upfront costs
Typical no Prepayment penalties	Limits on prepayments

A HELOC may be more suitable if you need flexibility or ongoing access to funds, while mortgage refinancing could be better if you prefer a fixed interest rate or need a large lump sum.

Should You Get a HELOC?

While HELOCs can be a useful financial tool, it’s crucial to use them responsibly to avoid taking on unmanageable debt:

• Borrow Only What You Need: Just because you have a high credit limit doesn’t mean you should use it all. Borrow only what you need and have a plan for repaying the funds.
• Make a Repayment Plan: Treat it like any other debt and make a plan for repaying the borrowed funds. Consider making principal payments in addition to the required interest payments to pay off the debt faster.
• Monitor Your Spending: Keep track of the balance and ensure you’re not over-borrowing or using the funds for unnecessary purchases.
• Have a Backup Plan: Be prepared for potential interest rate increases or changes in your financial situation that could affect your ability to repay.

What are Alternatives to Consider?

While HELOCs offer homeowners an affordable way to tap into their equity, make sure you also consider alternatives:

Home Equity Loan

Home equity loans provide a set amount upfront at fixed interest rates. This avoids variable rates but has less flexibility.

Cash-Out Refinance

A cash-out refinance converts extra equity above 20% into tax-free cash while recasting your mortgage. But higher monthly payments result.

Reverse Mortgage

Reverse mortgages allow seniors 55+ to convert equity into tax-free income without monthly payments or having to move.

Be sure to evaluate whether these other products better suit your financial situation and goals.

Key Takeaways on HELOCs in Canada

The key points to remember are:

• A HELOC provides flexible access to home equity funds at low variable interest rates.
• You can borrow up to 65% of your home value or 80% when bundled with a mortgage.
• Only monthly interest payments are required, but the principal must be repaid eventually.
• Good credit, sufficient income, and adequate home equity are needed to qualify.
• Closing costs include appraisal fees, application fees, and legal charges.
• Have a solid repayment strategy for borrowed amounts
• Consider both risks and benefits compared to alternatives like refinancing.

HELOCs can be excellent tools for homeowners needing to access large amounts of cash. However, they should be pursued cautiously, and you should ensure you have the financial capacity to manage the obligations.

Your next step is to contact Best Mortgage Online’s mortgage brokers to discuss the specifics of your situation.

FAQs

Article Sources

1. Home Equity Line of Credit: The Complete Guide
2. Getting a home equity line of credit