Home Equity Line of Credit

Home Equity Lines of Credit or HELOCs are popular among the Canadian public as they offer easy and relatively inexpensive access to funds. Once the amount is agreed, the money can be withdrawn whenever it is needed.

A HELOC is ideal for those who don’t need a large sum of money all at once but who want to use their home equity for easily accessible funds in the future.

Home equity is the portion of your home that you own. It is calculated by subtracting the amount owed on the property from its market value. In many instances, home equity represents a significant portion of the home owner’s wealth.

The amount of home equity that you have accumulated will depend on the appreciation of property values over time, the size of the initial down payment and how much of the principal amount has been paid. Every time you make a payment on your Mississauga home, a portion of that payment is allocated to the principal amount.

HELOCs are restricted by law to 65% of the appraised value of the property, but this can be supplemented by a mortgage of up to 80% of the value. You can increase the HELOC as the equity in your home increases but you will have to make a new application and pay additional costs when you do this.

HELOCS operate like a revolving line of credit and you can use the funds up to the agreed amount as and when you need them. Because it is a secured loan it is a lot cheaper to service than most other lines of credit.

The interest rate is usually governed by the prime interest rate. HELOCs operate on adjustable interest rates, so you run the risk of interest rates rising. Because of this risk, you should be careful to keep the repayments well within your ability to pay.

A default in payment could result in you losing your home. Some lenders will allow you to lock in a portion of the HELOC to reduce the risk.

HELOCs are interest-only loans for an agreed period. After the period has lapsed the installments will be increased to include the principal. The HELOC is technically the second mortgage and so in the case of payment default, the lender will receive payment only after the primary mortgage has been settled. Because of this additional risk, the interest rate on the HELOC will be higher than the interest on the primary mortgage.

Most Mississauga lenders will allow you to take a HELOC at any time during the mortgage period. The amount that they lend you will depend on the appraised value of your home at the time of the application. The cost of the appraisal and the closing fees are the only costs that you will pay over the term of the HELOC.

HELOC’s are subject to review and can be revoked or reduced by the lender at any time during the term of the loan.

Whilst HELOC’s are great financial tools for those wanting flexible and accessible finance, at relatively low cost, as with all such matters, you should discuss costs and the terms and conditions of the contract with your mortgage broker before signing a contract.