Home Equity Line of Credit (HELOC) Calculator 2024

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A home equity line of credit, or HELOC, allows you to borrow against the equity of your home at a low cost. Unlike a mortgage or home loan, it's a flexible line of credit and you can use it only when you need to.

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What is a HELOC and how does it work?

HELOC is a popular lending product in Canada. In fact, as of July 31, 2024, HELOCs accounted for 7.2% of the lending portfolio of federally regulated banks. A home equity line of credit provides you with a line of credit with a pre-approved limit (like a credit card). Also like a credit card, you can draw from and pay back into it whenever you want. There is, however, no grace period where you won’t be charged interest until a certain date – the moment you withdraw from the HELOC, interest starts accruing. Compared to mortgages, HELOCs tend to have higher interest rates. They are also usually only offered as variable rates, although some lenders allow you to convert part of your HELOC into a home loan with a fixed rate and term.

Is getting a HELOC a good idea?

With financial discipline, a HELOC can be a great idea and here is why. One of the best uses of HELOC is to improve an existing asset to generate wealth. For example, if you borrow money from a HELOC to do home renovations the return from the improvements could be greater than what needs to be paid on the interest of the HELOC. This is especially worth it if you are selling a home. Another example is financing something long term like a student loan. Again, the interest on the HELOC could be lower than a regular student loan.

A common question generally asked is, can't I do the above with a loan? You could, but with more restrictions that may not make it worth it. With a HELOC, when carrying a balance, all that needs to be paid is the minimum interest unlike various loans. A lot of the time different forms of loans charge a penalty to pay off the principal. With a HELOC, you pay off the pricinpal without penalty.

How is my HELOC limit calculated?

In Canada, you can only borrow up to 65% of your home's value with a HELOC. When combined with a mortgage, your Cumulative Loan To Value (CLTV) cannot exceed 80%. This means that your mortgage and HELOC combined cannot exceed 80% of your home's value. If you owe 50% of your home value on your mortgage, you would be eligible for a HELOC of up to 30%. Below is the formula used:

*Maximum HELOC Amount is up to 65% of home's market value

If you do not use a combination mortgage-HELOC product or have additional loans secured by your home (i.e. a second mortgage), your HELOC limit may be different from the above calculations. Credit unions and other non-federally-regulated lenders may also use different criteria for determining your HELOC credit limit.

How are payments calculated on a HELOC?

A HELOC is a revolving line of credit that is always open for use and you are not forced to borrow from it. It's there as needed. So if you have not borrowed from your HELOC then you have no monthly payments. But if you do have a balance, then the only monthly payment you have to pay is the interest. Use our payment calculator above or use the below formula:

One of the main advantages of the HELOC is the ability to pay down the pricinpal whenever one would like. No pricinpal monthly payment required.

A HELOC is a revolving line of credit. This means the principal borrowed amount can be paid off in full at any time.

The HELOC stress test

Although you could potentially qualify for a credit limit of up to 65% of your home's value, your real limit may be subject to a stress test similar to the mortgage stress test. Banks and other federally regulated lenders will use the higher of either:

• the Bank of Canada five-year benchmark rate, currently set to 5.25%, and
• your negotiated interest rate plus 2%.

to determine your credit limit. You may also be subject to further restrictions based on your credit score, proof of income, and current debt levels including credit card and auto loan debt.

What is the difference between getting a HELOC and refinancing my mortgage?

Refinancing your mortgage allows you to borrow a lump-sum at a mortgage interest rate that is usually lower than what you would be able to get on a HELOC. Unlike a HELOC, however, you will have to make regular payments torwards your mortgage that include both principal and mortgage payments. With a HELOC, you can make interest-only payments, significantly reducing the amount you have to pay back each month. This can be helpful if you will only be able to make a repayment sometime in the future, like in the case of renovating your home.

For a HELOC, the interest rate is typically a lenders prime rate + 0.5%. Prime Rates are set by the lenders and can differ from institution to insitution. This means, unlike the fixed payments in a fixed-rate mortgage, a HELOC's rate is variable. So if a lender increases its prime rate, then your HELOC interest payment increases. The rates are typcially higher than the rate of the initial mortgage.

Mortgages also often come with pre-payment limitations and penalties. You will not be able to pay off the amount you borrowed immediately, and it will continue to accrue interest. A HELOC, on the other hand, gives you the flexibility to borrow and pay off the credit whenever you want.

What is the difference between getting a HELOC and a second mortgage?

While both a HELOC and a second mortgage use your home equity as collateral, a second mortgage can offer you access to a higher total borrowing limit at a higher interest rate. This can be up to 95% of your home's value compared to the 65% limit for a HELOC. The differences between the HELOC as a line of credit and the second mortgage as a loan still apply: with a HELOC, you are free to borrow and repay on your schedule while you can only borrow a fixed lump-sum from a second mortgage and have to make payments for the second mortgage on a fixed schedule.

The lender for your second mortgage is not typically the same as your first lender who you would usually get your HELOC from. You will have to shop around to find the best terms.

Is a HELOC better than a mortgage?

It depends. If you have read the above sections, then the answer changes for different situations. Ask yourself questions like, how much do I need to finance? Why do I need the money? Do I have good financial discipline for a HELOC? How much equity has been built into my home? After reflecting on questions like these, the solution to your financial needs should become clear.

Applying for a HELOC could potentially affect your credit score . It acts as a revolving line of credit, similar to a credit card, and a high utilization rate can negatively impact your credit score. If used correctly , however, it can decrease your total credit utilization rate and act as a positive indicator of good borrowing behaviour.