As home prices continue to climb and home equity increases across the country, you may have considered if a Home Equity Line of Credit (HELOC) is right for you. A HELOC is a revolving line of credit that is secured against the equity in your home. In Canada, there are approximately 3 million HELOC accounts with an average outstanding balance of $70,000.1 Before applying for a HELOC, here are some things to help you determine if it’s the right choice for your financial situation and goals.
HELOC? Home Equity Loan? Second Mortgage? Explore all the options that let you take advantage of your home’s equity.
What Goals Could a HELOC Help You Achieve?
HELOCs are gaining popularity for a variety of reasons. They offer a more affordable alternative to other lending options, like unsecured loans or credit cards. With the option for interest-only payments, homeowners can easily incorporate HELOC payments into their existing budget.
One of the main highlights of the HELOC is its flexibility. Once you apply and are approved for a HELOC, you have the flexibility to use the funds for whatever purpose you’d like. For that reason, it’s important to think about your why – your reason for getting a HELOC in the first place.
While you can use a HELOC for almost anything, there are certain uses that may be more beneficial in the long run.
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Home Renovations |
Education & Training |
Debt Consolidation |
How Much Equity is Available in Your Home?
How much money you’re able to access through a HELOC depends on the amount of equity you’ve built up in your home. In Canada, you’re able to borrow up to 65% of your home’s value as a readvanceable, or revolving, HELOC. If you have a HELOC combined with your mortgage, also known as a combined loan plan, the combined value of the HELOC and outstanding mortgage can’t exceed 80% of the value of your home.
Let’s calculate the maximum HELOC amount on a home valued at $700,000 with a remaining mortgage balance of $300,000.
$700,000 Home Value x 80% = $560,000
$560,000 - $300,000 Mortgage Balance = $260,000 Maximum HELOC Amount
If you’ve recently purchased your home or purchased with a smaller down payment, you may have to wait for your home’s equity to grow before exploring the option of a HELOC.
What to Expect When Applying for a HELOC
A HELOC provides homeowners with a method to help achieve their financial goals, but there are also aspects like eligibility, fees and timelines to consider as well. In addition to adequate home equity, lenders will also consider these criteria when determining a homeowner’s eligibility for a HELOC:
- Credit score
- Proof of adequate and stable income
- Debt to income ratio
- Stress test
From start to finish, the process of getting a HELOC can take anywhere from two weeks to two months. Some factors that can impact the timeline are within your control, like how prepared you are with documentation, but other parts rest on how quickly the lender can process everything. If you’re planning to use the funds from a HELOC for a project or specific goal, account for a lengthier timeline to avoid disappointment.
Did you know there may be fees associated with getting a HELOC? For those interested in a HELOC, depending on your lender, you can expect fees totaling approximately 2% - 5% of the total loan amount.
Tips for Using a HELOC Wisely
However you decide to use your HELOC, here are some tips to manage your funds wisely.
- Consider using savings: If you have funds saved, consider using that money first so you don’t have to pay interest.
- Make a payment plan: Set a goal to pay back more than the interest-only payments required for your HELOC.
- Opt for a lower limit: Only take the credit limit you need so you’re not tempted to spend more.
Making the Right Decision for Your Situation
If you’re a homeowner with equity in your home, a HELOC is a great tool that can help you reach your financial goals. As with any financial decision, take time to consider if it’s the right option for you. If you’re an MCAP homeowner and you’re interested in exploring how to use your home’s equity, contact us and we’d be happy to help!
1 Home equity lines of credit: Market trends and consumer issues
