Home Equity Line of Credit:
All You Need to Know
Home Equity Line of Credit (HELOC) Limit Calculator
What You Should Know
- Home equity lines of credit (HELOC) lets you borrow money using your home’s equity.
- HELOCs can be borrowed from, repaid, and borrowed from again without needing to make new loan applications.
- The minimum payment required is only interest, and you’re only charged interest on the amount that you actually borrow.
- HELOCs usually have a variable interest rate based on the prime rate.
What is a Home Equity Line of Credit?
A Home Equity Line of Credit, commonly referred to as HELOC, is a type of revolving credit that is secured by the equity in your home. Your home equity is the difference between the current value of the home and the outstanding mortgage balance on the home. Home equity is something that you own, which makes it an asset. By using your home equity as collateral, you can borrow money at a lower secured interest rate.
HELOCs are revolving accounts, which means that you can borrow, repay, and borrow money again. That’s unlike a loan, where you borrow a lump-sum amount upfront and then gradually make loan payments to pay it off. HELOCs usually only have a minimum monthly payment that is just the interest.
The credit limit of a HELOC is based on your home equity. Since your home equity increases as you make mortgage payments, where your principal gets paid down, some HELOCs may even have a credit limit that automatically increases as your equity increases. This is known as a readvanceable mortgage and could be offered by some lenders when you have both a mortgage and a HELOC together.
What Makes a HELOC Flexible? 💡
HELOCs are flexible because they allow you to borrow money whenever you want, and you're only charged interest on the amount that you actually borrow. They also usually only have minimum monthly payments of interest and fees, making HELOC payments lower than mortgage payments.
You can also repay some or all of a HELOC at any time, and should you wish, you can reborrow these amounts again as well. Some HELOCs that are combined with a mortgage may even have a credit limit that automatically increases as you make mortgage payments! This makes HELOCs a flexible way to borrow money at a low interest rate, all from one application.
HELOCs in Canada
TD Home Equity FlexLine
Max Credit Limit: Lesser of 80% of your home's value or purchase price
Current TD Prime Rate: %
TD’s home equity line of credit is called the TD Home Equity FlexLine. It has a variable interest rate based on the TD prime rate. With TD, you can borrow up to 80% of the value of your home or the purchase price of your home, whichever is lower, and dependent on your current mortgage balance.
TD allows you to convert some or all of your TD HELOC into a term loan, where you’ll make regular payments to pay off the loan. You can choose between a fixed or variable interest rate for any term portion.
You can access and borrow funds from your TD home equity line of credit through online banking, the TD mobile app, cheques, or by using your TD Access Card to make purchases or to withdraw cash at ATMs. There can be additional fees for withdrawing funds from your HELOC through an ATM.
RBC Royal Credit Line
Max Credit Limit: 65% of your home's value
Current RBC Prime Rate: %
The RBC Royal Credit Line is RBC’s home equity line of credit (HELOC) product. RBC's home equity line of credit has a lower credit limit of up to 65% of the value of your home. That's lower than other banks that might have a credit limit of up to 80% of the value of your home. The minimum amount that you can borrow is $5,000.
Just like other banks, RBC's HELOC has a variable interest rate based on the RBC prime rate. Besides using your home equity to secure the RBC Royal Credit Line, you can also use your investment portfolio as collateral.
RBC also offers a readvanceable mortgage where your HELOC credit limit on your Royal Credit Line would increase as you make mortgage payments. This is offered through the RBC Homeline Plan, which bundles an RBC mortgage with an RBC Royal Credit Line. With the RBC Homeline Plan, you can have a higher credit limit of up to 80% of the value of your home, less the balance of your mortgage.
To borrow money from your RBC HELOC, you can use online banking to transfer funds, withdraw from an ATM, or use cheques.
CIBC Home Power Plan
Max Credit Limit: 80% of your home's value
Current CIBC Prime Rate: %
The CIBC Home Power Plan Line of Credit, CIBC’s home equity line of credit, is part of the CIBC Home Power Plan, where you can combine the line of credit with your mortgage to borrow up to 80% of the value of your home. The minimum amount that you can borrow is $10,000. It offers automatic rebalancing, where your CIBC Home Power Plan Line of Credit would have its credit limit increased automatically, up to a specific limit.
BMO Homeowner's Line of Credit
Max Credit Limit: 65% of your home's value
Current BMO Prime Rate: %
BMO's home equity line of credit, called the Homeowner's Line of Credit, lets you borrow $5,000 up to 65% of your home's value, less any outstanding mortgages. You can borrow using online banking, through BMO's mobile app, using cheques, or by withdrawing money at a branch.
The BMO Homeowner ReadiLine lets you borrow up to 80% of your home's value as long as any amount over 65% of your home's value is borrowed as a term loan. The Homeowner ReadiLine would need to be the first mortgage; it cannot be a second mortgage.
ScotiaLine Personal Line of Credit
Max Credit Limit: 65% of your home's value
Current Scotiabank Prime Rate: %
Scotiabank's ScotiaLine Personal Line of Credit is part of the Scotia Total Equity Plan (STEP), which allows you to borrow up to 65% of your home's value, up to $1.5 million or $500,000 with a VISA access card. Scotiabank's home equity line of credit has a minimum credit limit of $10,000.
To access funds from your ScotiaLIne Personal Line of Credit, you can use online banking, cheques, or even get a VISA card to make purchases directly from your Scotiabank home equity line of credit or to withdraw cash from ATMs. Withdrawing cash from Scotiabank ABMs is free, but non-Scotiabank ABMs come with a cash advance fee.
National Bank All-In-One
Max Credit Limit: 65% of your home's value
Current National Bank Prime Rate: %
National Bank's All-in-One is a HELOC that lets you borrow up to 65% of your home’s value, or up to 80% when combined with a National Bank mortgage. When combined with a mortgage, automatic rebalancing will increase your credit limit as your principal is repaid. Another benefit is that monthly fees for bank accounts with National Bank are reduced to $7 per month per account.
Simplii Secured Line of Credit
Current Simplii Prime Rate: %
Simplii's home equity line of credit is simply called a Secured Line of Credit. If you currently have a mortgage with Simplii, you’re eligible for “VIP Rates” on Simplii’s HELOC. This could give you a HELOC rate below prime! If you only have a HELOC with Simplii, you can still be eligible for rates as low as the prime rate.
Tangerine Home Equity Line of Credit
Max Credit Limit: 65% of your home's value
Current Tangerine Prime Rate: %
Tangerine's Home Equity Line of Credit has an interest rate that is 0.50% above the current Tangerine prime rate. You can borrow up to 65% of your home’s value, and you can set up regular fixed payments.
Do I Need to Get a HELOC From My Mortgage Lender? 💡
No, you don’t have to get a HELOC from your mortgage lender. In most cases, you can get a HELOC from any lender, even if your original mortgage isn’t with them. However, some banks and lenders might only offer HELOCs in first position, such as with Tangerine. If your lender requires the HELOC to be in first position, you can’t have a mortgage with any other lender.
Using a HELOC to Buy a Home
Did you know that you can use a home equity line of credit to purchase a home in Canada? The catch is that you will need to make a larger down payment, a minimum of 35% of the home’s purchase price, in order to get a stand-alone HELOC. That’s because HELOCs on their own can only be for up to 65% of your home’s value or purchase price.
Using a HELOC to finance the purchase of a home allows for much lower monthly payments since you can make interest-only payments.
You’ll still need to pass the mortgage stress test when applying for a home equity line of credit. The stress test involves proving that you have enough income to cover your HELOC or mortgage payments, even if interest rates rise. This is done by using an interest rate of 5.25% or your rate + 2%.
Just like with mortgages, your lender may offer loan disability insurance or loan life insurance. You’re not required to purchase insurance in order to get a HELOC in Canada.
HELOC Fees 💡
There are some fees associated with getting a HELOC. These fees may include an application/administration fee, a home appraisal fee, and possibly legal and title search fees.
Using a HELOC to Consolidate Debt
If you have high-interest debt, such as credit cards or auto loans, using a HELOC to consolidate your debt could save you money. With a HELOC, you can take out a loan against the equity of your home and use that to pay off those debts. You’ll be left with one loan payment at a lower interest rate than your original debt payments, saving you interest and potentially freeing up some cash flow each month.
To see an example of how much you can save, let’s take a look at someone with a $5,000 balance on their credit card with a 19.99% interest rate. They have access to a HELOC with a rate of 5%. How much interest would each option take if the debt takes 5 years to be paid off?
By paying off the $5,000 debt over 5 years through a HELOC rather than on your credit card, you’ll save $2,287 through lower interest charges. The monthly payment is also lower too. If you’re strapped for cash, you can even lower your monthly payment even further to just the interest for each month, which would be $20.60 per month. However, as you’re not paying towards the principal, you will eventually have to make principal payments to pay off the debt.
Paying Off High-Interest Debt with a HELOC
| $5,000 Credit Card | $5,000 HELOC | |
|---|---|---|
| Monthly Payment | $132 | $94 |
| Total Interest | $2,948 | $661 |
Using a HELOC to Invest
You can use the funds borrowed from a home equity line of credit for any purpose, including investing. By borrowing money to invest, you’re leveraging your funds. This could potentially increase your returns, but the risk is losing money that you borrowed. You’ll also need to achieve investment returns that are higher than your HELOC’s interest rate. Keep in mind that home equity lines of credit have a variable interest rate. Your monthly interest payments may increase even if your investment income doesn’t.
If you borrow money to invest in Canada, you can deduct the interest paid on the loan from your taxable income. That’s because the interest expense is deductible as long as the borrowed funds were used to purchase investments where there is an expectation of generating income, such as interest income or dividends. Having the HELOC interest be tax deductible can help reduce the amount of taxes you pay and increase the return on your investment.
Another strategy that can be used is called the Smith Maneuver. This is when you get a readvanceable mortgage with a credit limit that increases as you pay off the mortgage and use the HELOC portion to invest. This allows you to deduct some or all of your mortgage’s interest expense indirectly through your HELOC.