A home equity line of credit, or HELOC, is a revolving loan secured by your home. You can borrow, repay and borrow again up to a limit, much like a credit card, and you pay interest only on the amount you have drawn. It can be useful, but because your home secures it, missed payments put the home at risk.
How the rate is set
Most HELOCs have a variable rate. The rate is usually the lender’s prime rate plus or minus a margin, so it moves when prime moves. Ask whether the margin depends on your credit profile and how much equity you have.
How much you can borrow
Lenders limit a HELOC to a share of your home’s value, minus what you still owe on the mortgage and any other loans secured by the home. Ask for the exact limit and the total secured balance the lender allows. A home with an insured (high-ratio) mortgage is usually not eligible, so check this before you apply.
Interest-only payments
Many HELOCs allow interest-only payments. In a 2017 report, the FCAC found that more than one-quarter of HELOC borrowers were making only interest payments. Those payments leave the balance where it is, so the amount you owe stays the same for as long as you carry it.
Combined products
Some lenders sell a HELOC combined with a mortgage in one product, sometimes called a readvanceable mortgage. Repaying the mortgage can free up room on the line of credit. The terms differ widely, so compare the total cost, not only the first-year payment.
Risks to check before you borrow
- A variable rate can rise, and an interest-only payment rises with it.
- If you do not repay what you owe, the lender can take steps to recover the debt, including action against your home.
- Borrowing against your equity leaves you with less cushion if house prices fall or you have to sell.
Compare it with the alternatives
Use the HELOC calculator to see the limit and the interest-only payment at a rate you are offered. You can also compare it with a new mortgage or refinance, or with a reverse mortgage if you are 55 or older. If you are already struggling with payments, the mortgage relief options guide covers what to do first.
Official source
FCAC · Home equity lines of credit may put consumers at risk
This guide explains general rules. Confirm your figures with your lender, lawyer, or the official source before you act.