If you are a home owner in Canada and you have enough equity in your home to cover up your debts other than mortgage, you can make use of Home Equity Line of Credit (HELOC) to combine all your debts in one mortgage. As home is one’s most valuable personal asset, many borrowers undertake home equity line of credit as a guarantee.
Accessible Home Value
As per the industry standards followed in Canada, you cannot access more than 65% of your home’s value using home equity line of credit. It must also be noted that the outstanding mortgage amount and HELOC, collectively, could not exceed 80% of the total value of home. Consider the following example to calculate the equity at your disposal.
|Appraised Value of Home||$300,000|
|Maximum Equity in Home Accessible using HELOC (65%)||$195,000|
|Maximum Accessible Equity in Home (HELOC + Outstanding Mortgage) (80%)||$240,000|
|Outstanding Mortgage Amount (55% of Appraised Home Value)||$165,000|
|Accessible Equity in Your Home using HELOC (25% of Appraised Home Value)||$75,000|
Revolving Line of Credit
As stated earlier, HELOC is a type of revolving credit up to a specified limit that is accessible any time. However, the HELOC rate (interest rate) is only applied when the amount is accessed or withdrawn. Although the interest charged on HELOC is always variable, there is still a significant difference between HELOC variable rate and mortgage variable rate. In variable mortgage rate, a pre-specified amount is either subtracted from or added to the prime rate. HELOC rate on the other hand, is always a surplus of prime rate, while the surplus figure can be changed anytime by the lender.
Just like other lines of credit, you would have to only pay the amount of interest on your outstanding balance. However, if you want to pay off the outstanding amount, you would have to make extra payments at your own risk. You will not be charged with any prepayment penalties like those in mortgage.