Home equity line of credit

HELOC is a type of home equity loan and is a revolving amount of credit that is secured against your property.

With the Home Equity Line Of Credit, you can access up to 65% of your home’s value, however, the outstanding balance on your mortgage and line of credit combined cannot exceed more than 80% of the value of your home.

It always has a variable rate of interest based on the current Prime lending rate which today is 2.45%. Rates generally start at Prime plus one per cent and up depending on your qualifications and the lender.

It is fully open, which allows for flexible prepayment without any penalties. You can use the amount available for any purpose you want and only pay interest on the amount of the outstanding balance.

The minimum required payments are interest only.

It’s a great option for accessing equity in your home to put into other investments.

It can be a first position charge or be a second position charge behind your current conventional first mortgage to a maximum of 80% of the value of your property.

PROS

• The interest only payments can be lower than a standard mortgage payment
• The terms are fully open, which allows flexibility
• The interest calculations are simple
• The cost of borrowing is less than an unsecured line of credit
• It’s great to have available for emergencies

CONS

• The interest rates are higher than conventional mortgages. For example 3.45% compared to a five-year, fixed-term mortgage at today’s rates of 2.04%
• A charge is registered against your property, so if you sell your property the line of credit will have to be paid in full
• If you are carrying a long-term balance, the cost can be expensive
• There is no principal reduction in the amount you owe if you are only making interest payments
• The rate will fluctuate based on changes in the prime lending rate
• A line of credit is not portable, so it can’t be moved to a new property and must be paid in full if you sell your current home
• If you owe other debt to your mortgage lender those amounts may also have to be paid in full

There are a few other facts that should be known about HELOCs.

• The rate can be increased at any time
• Your lender can demand the balance outstanding on your HELOC at any time
• Your lender can raise or lower the credit limit at any time

A home equity line of credit can be a great product if it used as intended as a revolving line of credit, but it can also be risky as it uses up the equity in your home which for many is the only way to build wealth and savings for the future.

In a 2017 report, FCAC (Financial Consumer Agency of Canada) found home equity lines of credit may be putting some Canadians at risk of over borrowing.

That report found most consumers do not repay their HELOC in full until they sell their home.

About 19% of respondents to the survey said they'd borrowed more than they intended and many didn’t know how much they owed.

If you have been carrying the balance on a HELOC for a long time without any principal reduction then it might be time to consider other mortgage options.

Please give me a call if you would like to review at 1-888-561-2679 or email [email protected]

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.