Home Equity Line of Credit (HELOC)

A home equity line of credit is a revolving loan that uses your home as collateral. Also known as a HELOC, it can be coupled with a mortgage or used for financing another home. It is similar to a credit card; HELOCs need to have its minimum payments amounts paid monthly.

New homeowners with a mortgage are usually offered a HELOC if they have enough down-payment for equity in their home. You can either get it at a bank or other financial institutions.

People get a HELOC for similar reasons why people get a cash-out refinance: weddings, car payments, investments, tuition, home renovations, medical expenses, TFSA/RRSP contributions, etc.

The great thing about a home equity LOC is that it's there when you need it.

Advantages

The main advantage is the flexibility:

• Unlike a refinance, you don't need to break your existing mortgage to get one and therefore possibly pay a mortgage penalty.
• Flexible access to cash.

Disadvantages

The main disadvantages are the fees and high requirements:

• Affected by the prime rate: your monthly payments will likely increase if the prime rate goes up.
• High qualification requirements.
• Additional fees.
• Penalties for missing payments.

Because the amount of HELOC available is calculated from your home's value, you need to pay for home appraisal fees. Other fees may include: title search and insurance fees, and legal fees.

Refinance vs. HELOC

As mentioned above, people often get a cash-out refinance or home equity line of credit for similar reasons. HELOCs are used as you need it, whereas the money taken out of a refinance is used right away. You can learn more about refinancing here.

Cash out refinance:

• Breaking current mortgage for a new one.
• Interest on the entire amount starts immediately.
• The interest rate is generally lower but may incur penalty fees for breaking the mortgage.

Home equity line of credit:

• Generally at a higher interest because of the prime rate.
• Pull out money as you go.
• The mortgage isn't broken for a new one i.e. no penalty fees.

Requirements

Like other loans, a HELOC will require good credit, stable income and a reasonable amount of debt relative to that income:

• Own at least 20% equity in your home.
• Good credit: generally 650 minimum but 740+ for often the best rates.
• Proof of income: T4, pay stubs, etc.
• Relatively good income to debt ratios

Don't meet the requirements for a HELOC? You might be able to qualify for a second mortgage.

Home equity line of credit calculator

To calculate how much you qualify for with a HELOC: take the maximum LTV (loan to value), which is 80% of the the home value and subtract the remaining mortgage balance. It's important to check that the HELOC amount does not exceed 65% of the home's value.

For example, if the home is appraised at $350,000, the max LTV amount would be $350,000 x 80% = $280,000. Subtract the remaining mortgage balance: $280,000 - $175,000 = $105,000 to get the eligible HELOC amount. Now divide that by the home's value: $105,000 / $350,000 = 30%. Since the amount does not exceed 65% of the home's value, we're good!

You can also test out our light-weight calculator to see how much you could get:

Of course, the above assumes your credit, income and debt ratios are good. Learn more about Breezeful or apply below to find out how much actual HELOC you qualify for. We check over 100 lenders to find the HELOC with the most competitive rate.

If you're looking for information about a pre-approval instead, click here.

Get a HELOC today

Apply now to find out how much you're eligible for with a home equity line of credit.