If you own a home in Canada, you may have heard of a Home Equity Line of Credit, (HELOC). It is a type of loan that allows homeowners to borrow money against the equity they have built in their homes. In this article, we will explore what a HELOC is and how you can qualify for it. 

The difference between the value of your home and the outstanding balance on your home is called equity. HELOCs are available for homeowners who have built up equity in their homes.

Types of home equity lines of credit

Home equity lines of credit are classified into two types: those that are combined with a mortgage and those that are stand-alone products.

Combined home equity line of credit combines a first mortgage and a home equity line of credit. This is also referred to as a "piggyback loan." The borrower takes out a first mortgage for a portion of the home's purchase price and then a HELOC, to cover the remaining sum in a combined HELOC. The HELOC is typically designed as a revolving line of credit, which means that the borrower can draw on it as needed and repay the borrowed amounts over time.

One of the biggest advantages of a combined HELOC is that it allows borrowers to fund home purchases with a smaller down payment. This can be particularly helpful for homebuyers who don't have a large amount of cash available for a down payment. They can also benefit from the potential tax deductions associated with a combined HELOC.

As for disadvantages, the interest rate on the HELOC may be higher than the rate of the first mortgage, making the loan more expensive.

A stand-alone HELOC is a loan that is not combined with a mortgage. It is offered as a separate product and it is available for homeowners who have already paid off their mortgage or have a low mortgage balance. 

The primary benefit of a stand-alone HELOC is that borrowers can access their home equity without refinancing their existing mortgage or taking out a new first mortgage. This is especially useful for homeowners who have a low mortgage rate and do not want to lose it by refinancing. Also, standalone HELOCs may have lower interest rates than combined HELOCs.

But, stand-alone HELOCs may have disadvantages. For example, to secure the loan, the borrower may be required to pay additional fees and closing costs. Furthermore, if the borrower defaults on the HELOC, the lender may foreclose on the property, potentially causing the loss of the home.

How does a Home Equity Line of Credit work?

A HELOC functions similarly to a credit card. You are granted a specific amount of credit, which you can use as needed. You only pay interest on the amount of credit used, not on the entire credit line. As you repay the borrowed amount, the credit becomes ready for use again.

HELOCs often have variable interest rates, which means they might fluctuate over time. The interest rate is typically linked to the prime rate, which is the interest rate charged by banks to their most creditworthy customers.

How can you qualify for a Home Equity Line of Credit in Canada?

Several conditions must be met to qualify for a HELOC in Canada. To begin, you must have a certain level of equity in your house. The amount of equity necessary varies by lender, but it is often approximately 25% - 35% of the value of your home.

Besides having adequate equity in your house, you will also need a strong credit score and a consistent source of income. Lenders will consider your credit history and income to evaluate whether you qualify for a HELOC.

It should be noted that not all lenders provide HELOCs, and those that do may have various restrictions and interest rates. To get the best HELOC for your circumstances, browse around and compare offers from several lenders.

We offer some of the most competitive interest rates in the market, which can help you save money over the life of your loan. Our HELOCs are intended to give you the financial flexibility you require. You can use your credit line whenever you want and only pay interest on the amount you borrow. Our mortgage consultants have years of expertise in assisting homeowners in obtaining finance. We can provide you with experienced advice and information to help you make educated mortgage selections.

Before applying for a HELOC

Before acquiring a HELOC, there are a few crucial measures you need to take to ensure that you are making an informed decision. To begin, ensure that your credit report and credit score are in excellent standing, as this will have a big impact on your eligibility and interest rates. Second, determine your debt-to-income ratio to guarantee that you can afford to pay up further debt. In addition, browse and compare HELOC offers from various lenders to discover the best rates and terms that meet your demands.

Finally, you should consider talking with a mortgage professional to ensure that you completely grasp the HELOC's terms and conditions, as well as any potential hazards or fees involved with the loan. You can make an informed decision and ensure that a HELOC is the best financial option for you if you follow these steps.

Contact us today to schedule a consultation and get started on the road to achieving your financial goals.

Source:

https://www.canada.ca/