HELOC - Flexible and Re-Advanceable
A Home Equity Line of Credit, also know as a HELOC, is a line of credit that uses your home as security for the loan. A HELOC has a credit limit, and you are not required to withdraw that entire amount available immediately upon opening one. The HELOC limit will not exceed the amount of equity you have in your home, and generally the available HELOC amount will be 80% the value of your home minus your current mortgage balance. Therefore, you must have a minimum of 20% equity in your home to obtain a HELOC. (Note! New Canadian Government Rule Changes Limit Revolving Portion of HELOC to 65% of home value as of Nov. 2012.
The interest on home equity loans are variable, meaning the interest rate fluctuates with the prime rate. The quoted rates are usually prime or prime plus a premium. HELOCs are interest only, therefore your minimum payment on the HELOC is the amount of interest due each month.
A HELOC can be in first or second place on the title of your property. Your first mortgage lender must approve the HELOC in second place if you aren’t refinancing and placing your first mortgage and HELOC with the same lender. A HELOC may also be combined with your first mortgage (fixed or variable rate) in what is often called an All In One. This allows you to have a fixed/variable mortgage portion with a specified term, as well as a HELOC. As your pay down the balance of your mortgage, the credit limit of your HELOC increases, making more funds available to you.
HELOCs can be useful in the following situations:
- Investing: if you want to build an investment portfolio, and don’t have the cash sitting on hand but do have some equity in your home, you can get a HELOC and use the funds from it to purchase investments
- Purchasing a Revenue Property: if you’d like to purchase a second property to rent out, but don’t have the funds in pocket to do so, you can set up a HELOC on your principal residence to finance the down payment of the revenue property.
- Finance Renovations: you can use the money from your home equity loan to finance renovations you’d like to complete on your home. Many HELOC products will allow you to write cheques directly to your HELOC account, so you don’t have to draw the funds to your bank account then write the cheque. Some lenders will even issue credit cards that you can access your HELOC funds with.
- Implementing the Smith Manoeuvre: the HELOC/traditional mortgage combination is the instrument used to administer the Smith Manoeuvre, a creative investment and tax strategy. Please read more about the The Smith Manoeuvre.
Overall, a Home Equity Line of Credit can be a powerful tool for you if you have more than 20% equity in your home and are looking to do anything from invest to finance home renovations.
If you’d like to discuss whether a HELOC is right for your particular situation, please Contact Us and speak to one of our associates!