Language selection

Government of Canada / Gouvernement du Canada

Search

Home equity lines of credit

From: Financial Consumer Agency of Canada

Transcript

Understanding home equity lines of credit

A home equity line of credit (HELOC) is a revolving credit product secured by your home.

Revolving credit is a flexible type of loan. It allows you to access funds up to your credit limit, repay them and reuse the credit as needed. This makes it an easy way to access available credit.

With a HELOC, you only pay interest on the amount you borrow. You repay your HELOC by making regular payments.

As part of your regular payments, your lender may require that you pay:

You can make payments or repay the balance at any time.

With a HELOC, you borrow against the available equity in your home. It’s a secured credit product, where your home acts as collateral. This means your lender uses your home as a guarantee that you'll pay back the money you borrow. If you don't pay back what you owe, your lender may take possession of your home. This also means that if you sell your home, you must pay back your HELOC.

HELOCs often have interest rates that are lower than the rates of other credit products. For example, unsecured loans and credit cards.

A HELOC may be an option for you if you want to:

Learn more about choosing financial products and services that are right for you.

Learn more about debt consolidation.

HELOCs have advantages, but they also come with risks.

Some examples of risks include:

  • if interest rates increase, you may have a hard time repaying your HELOC, especially if you withdraw large amounts
  • if you don’t pay back your HELOC, you could lose your home
  • it reduces the equity in your home, which may:
    • affect your financial stability
    • limit your future options if you want to sell your home
  • the easy access to funds may tempt you to take on more debt than you’re able to pay back
  • if you only pay the interest, you won’t pay off your loan

Before you take out a HELOC, make sure you consider the risks and have a repayment plan.

Learn more about managing your debt.

Exploring types of home equity lines of credit

There are 2 main types of HELOCs:

Other products also allow you to borrow against home equity. Examples of these products include home equity loans and reverse mortgages. They’re different from HELOCs.

Learn more about borrowing against home equity.

HELOC combined with a mortgage

This HELOC depends on your mortgage. This means you need to contract it with the same lender who issued your mortgage. Your available credit increases as you pay down your mortgage principal. It’s also sometimes called a readvanceable mortgage.

Many financial institutions offer a HELOC combined with a mortgage under their own brand name.

Standalone HELOC

This HELOC is independent from your mortgage. The available credit won’t increase when you pay down your mortgage principal. You may choose different lenders for your mortgage and your HELOC. You may get this type of HELOC even if you don’t have a mortgage.

Most major financial institutions offer standalone HELOCs.

You may use it instead of a mortgage to buy a home. Before you do so, carefully consider the benefits and the drawback.

Examples include:

Learn more about mortgages.

Qualifying for a home equity line of credit

To qualify for a HELOC, you need to have equity in your home.

You need a minimum equity of:

You must also pass a “stress test” to qualify for a HELOC at a bank. This means that you need to prove you can afford payments at a qualifying interest rate.

Learn how the stress test may impact your qualification.

Before a lender approves your HELOC, you may need to:

Federally regulated banks must offer and sell you products and services that are appropriate for you. They must do so with consideration for your circumstances and financial needs. They must also tell you if they’ve assessed that a product or service isn’t appropriate for you.

Take the time to describe your financial situation to make sure you get the right product. Don't hesitate to ask questions and make sure you understand the product you have or want.

Learn more about your right to products and services that are appropriate for your needs.

Calculating the amount you may borrow with a home equity line of credit

With a HELOC, you may borrow up to 65% of the value of your home.

This means the maximum you may borrow on a HELOC depends on:

Your home’s value

Your lender may determine your home’s value by using:

They use this amount, along with your equity, to calculate your loan-to-value ratio.

Your home equity

Your home equity is equal to its value minus any debt you have on your home. This includes your mortgage.

For example, suppose that:

This means you have $300,000 ($500,000 - $200,000) in equity, which equals 60% of your home’s value.

Learn more about home equity.

Your credit limit

You may negotiate your HELOC’s credit limit with your lender. Lenders may approve you for a higher limit than you need. This may tempt you to overspend. To avoid this, consider asking your lender for a lower credit limit. This may help you stay within your budget and prevent unnecessary borrowing.

Planning for a home equity line of credit

Having a clear plan for your HELOC may help you avoid unnecessary spending and save money.

Set your objective

It’s important to define a clear objective for how you’ll use your HELOC. For example, you might decide to use it for home repairs or education, rather than for vacations or shopping. This may help you avoid accumulating more debt than you can pay back.

Create a budget

Create a budget to determine how much money you need and plan your spending carefully. Borrow only what you need. Managing your debts may be easier if you borrow less.

Use the Budget Planner to create a budget.

Establish a repayment schedule

Create a repayment schedule and stick to it. Plan your repayments by knowing when and how much money you need to pay back each month. Regularly set aside money to make these payments.

Consider a repayment schedule that includes more than your minimum payments. This may significantly reduce your interest costs.

Learn more about what to consider before borrowing money.

Leverage electronic alerts from your financial institution

Your financial institution may send you electronic alerts. They may do so when the credit available on your line of credit falls below a certain amount. These alerts may help you manage your day-to-day finances and avoid fees.

Learn more about your right to receive electronic alerts.

Withdrawing money from a home equity line of credit

Your lender may offer you different options to access the money from your HELOC.

You may be able to make transactions:

You may have other products with the same lender, like a chequing account.

In this case, your lender may allow you to use your debit card to: 

Your lender may also offer you:

With an access or debit card, you may make purchases in stores or online and get cash from ATMs. Remember that your lender charges interest as soon as you take money out of your HELOC.

Ask your lender for more details about how you can access your HELOC.

Evaluating the costs of a home equity line of credit

Before you get a HELOC, consider the costs. These include interest costs and other fees. This may help you determine if it’s the right product for your needs.

Interest costs

With a HELOC, you only pay interest on the amounts you borrow. Most HELOCs have a variable interest rate. You may be able to negotiate your interest rate with your lender.

If your HELOC has a variable rate, it’s typically based on your lender’s prime rate. For example, it may have an interest rate of prime plus 1%. If the lender’s prime rate was 5.85%, then your HELOC would have a rate of 6.85% (5.85% + 1%).

Your lender’s prime rate may change when the Bank of Canada changes its policy interest rate.

Learn more about the Bank of Canada’s policy interest rate.

This change may increase your minimum monthly payment amounts. Make sure you can afford higher payments if interest rates change.

Learn more about managing your money when interest rates rise.

With a HELOC, your lender may change your interest rate at any time.

Federally regulated financial institutions must give you a notice in writing if there’s a change. They must do so within 30 days of making the change.

Fees

Examples of fees you may need to pay for your HELOC include:

You may also need to pay fees if you cancel your HELOC.

Examples of these fees include:

Learn more about where to get information on your province or territory’s discharge process.

Ask your lender what fees apply.

Federally regulated financial institutions must provide you with information about your home equity line of credit.

Learn more about your right to information about lines of credit.

Optional credit insurance

Your lender might offer you optional credit insurance when you consent to get a HELOC. Optional credit insurance products include life, illness and disability insurance.

They may help you make your HELOC payments, or help pay off the balance if you:

You don’t need to purchase the insurance for your lender to approve your HELOC. The coverage that optional credit insurance products provide has important limits.

Read your insurance policy carefully. Ask questions about anything you don’t understand before purchasing this product.

Learn more about credit or loan insurance.

Cancelling or transferring a home equity line of credit

Before cancelling or transferring your HELOC, you must pay it off and close it. To do so, you’ll likely need to pay legal, administrative and discharge fees. Ask your lender what fees apply.

If you’re transferring your HELOC, ask your new lender if they cover any of the costs. For more information about cancelling or transferring your HELOC, check its terms and conditions.

Learn more about transferring your products or services to another financial institution.

Related links

Page details

Date modified: