What is a Home Equity Line of Credit and how can you get one?

You might have more access to funds than you think.

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September 27, 2022
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Life’s expensive and full of surprises–but thanks to certain credit products and options, it doesn't have to be. 

While you might have credit cards, personal lines of credit, and other loans, you might also want to see how your house can step in. One of the silver linings to owning is being able to qualify for a Home Equity Line of Credit (HELOC).

And while it may be a little jarring to think your home can give you access to funds, it’s not as scary of a process as you might think. 

First off, what is home equity?

To understand a HELOC, it’s important to  understand home equity. In the easiest terms, home equity is how much of your home you own vs. the mortgage you have left to pay back. 

If your home is currently worth $750,000 and your mortgage balance is $450,000, that means your home equity is $300,000. 

So then what is a HELOC and how does it work? 

Despite how complicated its name may be, a HELOC works similarly like a revolving line of credit. This line of credit, which is borrowed against your home, works like other lines of credit where you have a limit that you can pull funds from. But, thanks to the lack of restraints on when you can pull some funds, a HELOC offers more flexibility allowing you to withdraw money on a daily or weekly basis.

However, if you are approved for a HELOC, it’s important to know that lenders will often apply a time frame known as a draw period, where you’re allowed to withdraw money. This draw period is usually anywhere from three to 10  years. 

On some occasions, once your draw period ends, your lender may let you renew the line of credit, but if not you’ll have to start repaying what you owe over a period of time, known as the repayment period. Prior to the repayment period, however, you’ll at least need to make monthly interest payments on the money you pulled out. 

Overall, the length of a HELOC term can vary but can go up to 30 years (usually a 10-year draw period and a 20-year repayment period).

How much can you borrow?

How much money you’re able to get in your HELOC is dependent on a couple factors like your credit and unpaid debts, as well as the current value of your home, and what’s left on your mortgage. 

However, most lenders often allow a loan-to-value ratio (a calculation of the amount being borrowed compared to the value of the asset) that doesn’t exceed 80% of your home’s value and mortgage. Similarly, most lenders often won’t let the HELOC exceed more than 65% loan-to-value ratio, with some lenders not letting you exceed more than 50%.  

Credit score and debt aside, the best way to calculate that is:

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One of the silver linings to owning is being able to qualify for a Home Equity Line of Credit (HELOC).

How do you qualify for a HELOC in Canada? 

To get approved for a HELOC in Canada, you’ll need to at least own a minimum of 20% equity in your home. That means if your home is valued at $750,000 you need to own at least $150,000 equity, before lenders will consider approving you. In some circumstances, like in urban cities, you need at least 25% equity. 

Similarly, like other credit products, lenders will also look at your financial records and history: namely your credit history, credit score, proof of income, and your debt service ratios. 

Lenders may also ask for any documents related to a second mortgage on the property as well as payment history. 

The pros of getting a HELOC (over other credit options)

While credit cards are great for when you’re out and about, having a HELOC affords you the option for a: 

  • Lower interest rate on the money that you pull from the line of credit
  • Larger loan that you can tap into at any point
  • Source of money to pay for unforeseen expense–plus if your home appreciates in value, you can also take out more equity in a HELOC

Given that you can also use the money from a HELOC for anything–-think home improvements, business payments, or medical expenses–having access to this line of credit could be beneficial if you need the emergency cash. 

The cons of getting a HELOC

While there are inevitably pros to getting a HELOC, there are also some negative aspects to consider if you decide to borrow against your home. Before getting a HELOC, make sure to ask yourself: 

  • Am I comfortable having large amounts of available credit? Will it make it easier to spend higher amounts and will I be carrying debt for a long time?
  • Am I okay knowing my lender can take possession of my home if I miss payments?

Like any other credit product or loan, it’s crucial that you know your limit and only spend within it. 

If you’ve got questions about your home and if getting a HELOC makes sense for you, get in touch with one of our mortgage advisors today