Compare HELOC Rates: Are You Paying too Much?
HELOC in Canada: How much can I borrow?
A home equity line of credit (HELOC) is a line of credit that allows you to borrow from the equity in your home. Home equity is the difference between the value of your home and the unpaid balance of any current mortgage you may have. Your home equity increases with time as you pay your mortgage down and may increase as the value of your home increases.
Let’s take a simple example to help explain home equity. Say you have a home that is valued at $600,000. You have a mortgage on your home and you still owe $200,000. For now, let’s assume that you only have a primary mortgage and no HELOC (more on that later, including HELOC in Canada rates). In this example, your home equity would be $400,000 ($600,000 – $200,000).
The maximum amount that someone can qualify for with a HELOC is determined by a calculation called “loan to value” or LTV. LTV is calculated by the amount of the loan – which could be in the form of a primary mortgage or a HELOC – divided by the value of the home. For a HELOC, the maximum LTV is 65%. But an important additional factor is that your primary mortgage plus a HELOC cannot equal more than 80% LTV. Confused yet? Let’s look at a similar example to help better illustrate what this all means.
Just like the example above, you have a home that is valued at $600,000. You also have a primary mortgage of $200,000. Now remember, the maximum LTV on your home is $600,000 X 80% = $480,000. You have a primary mortgage of $200,000, so the maximum HELOC amount is $280,000 ($480,000 – $200,000).
But wait! There’s one more step. The maximum amount of a HELOC is 65% LTV. So, let’s check to see if the maximum HELOC is greater than 65% LTV: $280,000 divided by $600,000 = approximately 47%. In this case, you would qualify for a maximum of $280,000.
What are HELOCs used for?
Now that you know how much money you could potentially get with a HELOC, there are a couple of other important considerations before you decide whether a HELOC is right for you. The first is home equity line of credit rates, which we will address in detail below. The second consideration include the ways a HELOC can be used. Essentially, you need to ask yourself: what would I pay for if I tapped into my home equity?
Here are some of the most common uses of a HELOC:
Home improvement: Have you always wanted a new kitchen? How about an updated bathroom? A HELOC may be a way to get those projects done. Just remember though, that HELOC rates, since they are tied to prime, will increase in a rising rate environment. In addition, you will have to make regular interest payments, and will eventually have to pay back the principal.
Debt consolidation: Because a HELOC is secured to your home, HELOC rates in Canada tend to be lower than other forms of debt. This includes credit cards, personal (unsecured) lines of credit, and auto loans. However, although the home equity loan rate may be lower, it does come with an increased risk compared to an unsecured loan, since a lender can call the loan if you fail to make payments. That could mean you could lose your home.
Financial gifts: If you have grandchildren or perhaps children that still have student loans, a HELOC may be a good option to help with a down payment or to pay back student loans.
HELOC rates Canada
HELOC rates in Canada are only available in variable terms. This means that HELOC rates will not be fixed over any duration of the loan but will move when the prime rate changes. Typically, the major banks in Canada will change their prime rate when the Bank of Canada changes its prime rate. When the interest rate changes, your minimum payments will change as a result. This can cause uncertainty and anxiety amongst borrowers since HELOC rates in Canada will not be fixed for any duration.
Let’s look at some example of HELOC rates:
|HELOC provider||Maximum LTV||Credit score required||HELOC rate|
|Major bank||65%||Excellent||4.45% – 4.95%
(Prime + 0.5%-1%)
(Prime + 0.25%)
|Alternative lender||65%||Fair – Good||6% – 11%|
HELOCs vs. reverse mortgages in Canada
While the interest rates associated with a reverse mortgage are typically higher than a conventional mortgage or home equity line of credit (HELOC), there are 3 key benefits the CHIP Reverse Mortgage® has that the other two can’t provide.
For one, there are no regular mortgage payments required (which is the primary reason why reverse mortgage rates are higher than HELOC rates). Second, a reverse mortgage allows you to stay in your home as long as you want and lastly, you will never owe more than your home is worth (provided you have met your mortgage obligations, including paying property taxes and home insurance). As an added bonus, the qualification process can be a lot easier for a reverse mortgage than a HELOC. Credit scores and verified income are not nearly as important in qualifying for a reverse mortgage as they are for HELOCs.
Before deciding which option is right for you, it is important to look at all of the advantages and disadvantages. The CHIP Reverse Mortgage allows you to cash in up to 55% of your home’s value without having to make any monthly mortgage payments. You get to stay in the home you love while having the money (and the freedom) to finance your longer, more fulfilling retirement.
To find out how much tax-free cash you could qualify for, call us at 1-866-522-2447 and take the first step towards living retirement your way.