With a Home Equity Line of Credit, you can access up to 65% of the value of your home, but the outstanding balance on your combined mortgage and line of credit cannot exceed more than 80% of the value. from your home.
It still has a variable interest rate based on the current prime rate which is now 2.45%. Rates generally start at Prime plus one percent and higher depending on your qualifications and the lender.
It’s fully open, allowing flexible prepayment without any penalties. You can use the available amount for any purpose you want and only pay interest on the amount of the outstanding balance.
The minimum payments required are interest only.
This is a great option for accessing equity in your home to invest in other investments.
This can be a first position charge or a second charge behind your current conventional first mortgage up to a maximum of 80% of your property’s value.
- Interest-only payments may be lower than a standard mortgage payment
- The terms are completely open, which allows flexibility
- Interest calculations are simple
- Cost of borrowing is lower than an unsecured line of credit
- It’s great to have on hand for emergencies
- Interest rates are higher than conventional mortgages. For example 3.45% versus a five-year fixed term mortgage at current rates of 2.04%
- A charge is recorded on your property, so if you sell your property the line of credit will need to be paid in full
- If you have a long term balance the cost can be high
- There is no reduction in principal by the amount you owe if you are only making interest payments
- The rate will fluctuate based on changes in the prime rate
- A line of credit is not transferable, so it cannot be moved to a new property and must be paid in full if you sell your current home
- If you owe any other debt to your mortgage lender, these amounts may also need to be paid in full.
There are a few more facts you should know about HELOCs.
- The rate can be increased at any time
- Your lender can demand the unpaid balance of your HELOC at any time
- Your lender can increase or decrease the credit limit at any time
A home equity line of credit can be a great product if used as a revolving line of credit, but it can also be risky because it uses up the equity in your home, which for many is the only way to build wealth. and savings. for the future.
In a 2017 report, the Financial Consumer Agency of Canada (FCAC) found that home equity lines of credit could put some Canadians at excessive borrowing risk.
This report found that most consumers do not pay off their HELOC in full until they sell their home.
About 19% of survey respondents said they borrowed more than they expected, and many were unsure how much they owed.
If you’ve been carrying a HELOC balance for a long time without any reduction in principal, it may be time to consider other mortgage options.
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