If you own a home and want to borrow money at a competitive interest rate, a Home Equity Line of Credit might be the right choice for you.
A Home Equity Line of Credit (HELOC) is a type of loan secured against your home’s value and can be used for many kinds of expenses.
You can get a HELOC if you meet the legal requirements of your province or territory, such as having enough equity in your home.
However, you need to understand the Home Equity Line of Credit Canada’s new rules before applying for one.
In this article, I discuss everything you need to know about Home Equity Line of Credit Canada’s new rules to help you decide if this line credit is the perfect choice for you.
What is a Home Equity?
Home equity is a term most often used in the real estate market. It means the disparity between the market value of your property and the outstanding debt on your mortgage.
As a result, you will increase your home equity as you pay down your mortgage balance.
Therefore, when your home value increases, your home equity can also increase.
In other words, the more equity you have in your home, the better your chances of getting a home equity line of credit.
You can typically borrow money for a certain period under most home equity offers. Nevertheless, you must renew your credit line at the end of the term.
However, if renewals are not permitted on the plan, you cannot borrow more money. The full amount may be due at the end of the period for some offers.
What is a Home Equity Line of Credit (HELOC)?
A HELOC, or Home Equity Line of Credit, is a secured form of credit that uses your home as collateral.
Like a credit card, you can use the line of credit for any purpose that you want. There are no restrictions on how you use it.
A HELOC can be an ideal financial tool for using your home’s equity to pay for home improvements, debt consolidation, or even large purchases such as a new business venture.
This form of finance has an interest rate that is typically lower than other forms of unsecured credit, such as credit cards.
This secured loan can either be repaid all at once or in installments. Plus, you can access funds using either an interest-only period or a graduated-payment plan.
However, the line of credit must be paid in full every month. If you decide not to pay it back, you will lose your home to bankruptcy or foreclosure.
Also, the interest rates are variable rates that often fluctuate over time, just like other types of loans.
Now that you know what HELOC is let’s explore how you can use it to your advantage.
How Does a Home Equity Line Work in Canada?
A Home Equity Line of Credit allows you to borrow against the value of your home to pay for various expenses.
However, to receive a Home Equity Line of Credit in Canada, you must submit an application through a financial institution that offers this type of loan.
A home equity line of credit Canada provides you with an ongoing source of funds for potentially large purchases.
The loan amount will be based on your home’s equity and other factors like your credit history and the value of your property.
As mentioned earlier, your mortgage payment and home value increase determine your equity. So the greater your home equity, the greater your loan options.
HELOC only requires you to pay interest every month and the remaining amount at the end of the loan term. Nevertheless, interest rates change with the prime rate.
As a result, banks and other federally regulated financial institutions allow you to borrow up to 65% of the value of your house as a HELOC.
On the other hand, other lenders will include up to 80% of your home’s value with your HELOC.
In addition, there are some administrative fees associated with a home equity line of credit in Canada:
- legal fees
- title search fees
- title insurance fees
- appraisal fees
Types of Home Equity Lines of Credit in Canada
In Canada, there are two major types of HELOCs. The type of account you choose will depend on your financial needs and repayment schedule.
Below I discuss both types to help you evaluate which one would be best for your situation.
1. Stand-Alone Home Equity Line of Credit
A Stand-Alone Home Equity Line of Credit is where you use your home equity to get a loan on your own. This means it is not tied to any mortgage.
You can get up to 65% of your home’s value as a stand-alone Home Equity Line of Credit, no matter the size of your original mortgage.
Plus, if you pay down your principal mortgage, you won’t experience an increase in interest rate.
You can use a Stand-Alone Home Equity Line of Credit to substitute for a mortgage when you want to buy a home.
Therefore, instead of making fixed principal and interest payments, you can use this type of Home Equity Line of Credit.
Nevertheless, a Stand-Alone Home Equity Line of Credit requires a higher down payment or more equity in your home.
2. Home Equity Line of Credit Combined with a Mortgage
Also known as a readvanceable mortgage, a readvanceable mortgage integrates a fixed-rate mortgage and a Home Equity Line of Credit into one loan.
Home Equity Line of Credit combined with a mortgage is suitable for homeowners who want to pay off their mortgage.
A readvanceable mortgage is generally designed to be repaid over an extended period.
Because you can make extra payments towards your mortgage during the year, you may reduce the overall cost of your home loan by lowering the interest charges paid to your mortgage banker.
Unlike HELOCs, fixed-term mortgages, on the other hand, require you to make monthly payments on the interest and principal depending on an amortization plan.
Nevertheless, a HELOC combined with a fixed-term mortgage can give you up to 65% of your home equity.
You can finance your home purchase by applying for a Home Equity Line of Credit or taking out a fixed-term mortgage. However, you will need to talk with your lender to determine how to proceed.
A 20% down payment or equity is required as a minimum. If you just want to use a Home Equity Line of Credit to finance your property, you’ll need a larger down payment or greater equity.
As a result, you cannot finance more than 65% of the value of your house with a home equity line of credit in Canada.
In contrast, a fixed-term mortgage will allow you to borrow up to 80% of your home’s value.
Pros of Home Equity Line of Credit
- Quick and easy access
- Payments made only at interest
- Rates are lower than credit cards and other unsecured loans
- Loan repayment schedule that is flexible
- Loan amounts up to the credit limit of your account
- You can customize the service to meet your needs
- Suitable for consolidating debt
Cons of Home Equity Line of Credit
- At any time, you could be required to pay the entire amount
- Missing a payment can lead to the loss of your home
- If you don’t have disciplined finances, it can be quite risky
- Missing a monthly payment can lower your credit score
- A variable interest rate increases monthly payments
How to Borrow From a Home Equity Line of Credit?
As soon as a bank or financial institution accepts your application, your Home Equity Line of Credit can be accessed at any time based on your credit limit.
As a result, you decide what to do with the HELOC. You can use it to renovate your home, pay for your children’s education, or even consolidate debts.
As such, your HELOC can be withdrawn via ATM or by writing a check. You can even use online banking to pay your bills or transfer funds to other accounts.
Many homeowners with excellent credit scores take advantage of Home Equity Line of Credit loan terms to borrow cash.
The entire lending process from application to disbursement is quick and relatively painless if you have good credit.
Old Home Equity Line of Credit Rules
When it comes time to open a home equity line of credit (HELOC), the rules are more stringent than other types of loans.
Apart from having 20% equity, to qualify for a Home Equity Line of Credit in Canada, you must meet the following requirements:
Your credit score is essential, especially when it comes to HELOCs. To qualify for a home equity line of credit in Canada, you must have a good credit score.
These days, many lenders require borrowers to show proof of homeownership, like a recent copy of your last tax or mortgage bill.
Therefore, to qualify for this line of credit, you need to provide proof of ownership and the property’s address.
Do you also know that under some circumstances, your lender will make sure your home is safe and livable before issuing a Home Equity Line of Credit (HELOC)?
Your lender will send someone to ensure no obvious safety, health or code violations like unsafe wiring or flooding.
Additionally, if you can show that your current income is stable and sufficient, you may be able to qualify for a Home Equity Line of Credit (HELOC).
Home Equity Line of Credit Canada New Rules
If you’re looking to get a Home Equity Line of Credit (HELOC) and wondering if you meet the current rules and guidelines, we’ve got answers to your top questions.
Traditional banks have recently faced tighter regulations on mortgages due to the Home Equity Line of Credit Canada’s new rules. These rules also apply to Home Equity Line of Credit (HELOCs) since these are types of mortgages.
Under the Home Equity Line of Credit Canada’s new rules, a HELOC applicant must be able to repay a line of credit within 25 years.
This will apply to all new Home Equity Line of Credit, home equity loans, or balances on existing home equity lines of credit.
Also, banks must use their posted 5-year rate to qualify for a HELOC under the new rules. This is a much higher interest rate than HELOCs give.
The payback amount is calculated using the HELOC credit limit rather than the actual amount owed.
Additionally, banks must consider debt service ratios as part of these payments.
Consumers are also evaluated based on their credit cards and their ability to manage other debts.
However, the Home Equity Line of Credit is difficult to obtain in an environment where interest rates fluctuate.
Interest rates at the Bank of Canada are continuously rising, so payments are increasing. As a result, debt is increasingly expensive. Thus, it may be challenging to qualify for a HELOC within 25 years.
Big Banks Additional Rules
Some lenders are implementing their lending criteria in addition to the rules set forth by federal regulators.
When making decisions about mortgages, some banks now look at the credit limit on HELOC than how much is owed.
Previously, banks looked at the outstanding amount on a HELOC, which might be substantially less than the credit limit.
However, the rules now treat borrowers as though they are maxing out their HELOC, even if it isn’t the case.
Due to federal rules, the bank system changes with rising interest rates, consumers may find it hard to get new Home Equity Lines of Credit.
Additionally, homeowners might also find it difficult to renew their mortgage with the new home equity line of credit rules.
How to Get Around the New HELOC Rules?
As a result of the new rules, some borrowers might have to lower their HELOC limits or close them altogether.
Since their HELOCs are being treated as loans, even if they aren’t, it could inhibit their ability to get a mortgage in the future.
A lender with alternative lending capabilities might be able to help in this situation.
Even though the federal regulations require big banks to conduct stress tests on consumers seeking mortgages, not all alternative lenders follow the same rules.
Some alternative lenders can set their underwriting rules. Unlike HELOCs, they do not focus on your credit score or your credit limit. Your home’s equity becomes the focus.
Furthermore, their requirements are generally not as stringent as major banks.
Tips Before You Get a Home Equity Line of Credit
A Home Equity Line of Credit will give you a source of credit that is not just based on your current income.
However, there are several things you need to keep in mind before deciding if this type of credit is ideal for you. Here are some tips to help you:
- Before applying for credit, consider things such as the terms and fees involved, the interest rate, and the flexibility you’ll have
- Find out if you need extra credit or if you can save and use it instead
- You should have a clear idea of how you plan to use the money you borrow
- Ensure your budget is realistic
- Set up a repayment schedule and follow it
- Set a credit limit that is appropriate for your needs
- Negotiate with different lenders and look around for the best deal
Getting a Home Equity Line of Credit in Canada can be a beneficial financial option.
However, it is essential to understand how home equity lines of credit work before you borrow.
Knowing how it works and where to apply will ensure you’re not wasting your time.
Hopefully, now you know the home equity line of credit Canada’s new rules. The ball is now in your court to decide if HELOC is the best financing option for you.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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