Home Equity Line of Credit
Borrow when you need it. Pay interest only on what you use.
A HELOC is a revolving line of credit secured by your home. You draw on it, repay it and draw again, up to a limit set by your equity. The trade-off is a rate that usually moves with prime, and a balance that never shrinks if you only pay the interest.
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What homeowners use a HELOC for
A HELOC fits money you will need over time, or may not need at all. These are the usual reasons.
Renovations in stages
Draw as the invoices arrive instead of borrowing the whole amount on day one, so interest only runs on what has been spent.
A reserve you may never use
An open line for a large or unexpected expense. With a zero balance there is no interest to pay, though some lenders charge fees to keep a line open.
Paying out higher-interest balances
If you carry balances on credit cards or unsecured loans, a HELOC usually costs less. It works best with a plan to pay the line down, not just the interest.
How a HELOC works
Your equity sets the limit
On its own, a HELOC can reach 65% of your home's value. Combined with a mortgage, the two together can reach 80%, with the part above 65% in the amortizing mortgage.
Draw, repay, draw again
Use online banking, cheques or a card linked to the line. Interest starts the day you draw, and every dollar you repay is available to borrow again.
Minimum payments can be interest only
Many lenders require only the interest each month. That keeps payments low, but the balance does not shrink unless you pay more than the minimum.
The rate moves with prime
Most HELOCs are variable, usually set at the lender's prime rate plus a margin, and the lender can change the rate. When prime rises, so does the interest you pay.
Two ways to set one up, and what it costs
Combined with your mortgage
The line sits alongside your mortgage with the same lender. As you pay the mortgage principal down, the available credit on the line grows. Lenders often call this a readvanceable mortgage and sell it under their own brand name.
Standalone
Independent of your mortgage: it can sit with a different lender, or on a home with no mortgage at all. It needs more than 35% equity, and the available credit does not grow as a mortgage is paid down.
Qualifying
You need the equity, and at a bank you also pass the stress test: the greater of 5.25% or the contract rate plus 2%. Expect an appraisal and a lawyer to register the line against your home.
Costs and risks
Fees can include appraisal, legal and title costs, and sometimes monthly or cancellation fees. The line is secured by your home, and easy access makes it easy to borrow more than you planned.
Illustrative example
How the 65% and 80% limits combine
- Home value
- $600,000
- Standalone HELOC, up to 65%
- $390,000
- With a $300,000 mortgage, 80% cap
- Up to $180,000
80% of $600,000 is $480,000. Less the $300,000 mortgage, that leaves room for a line of up to $180,000, which is under the 65% cap. Your income and credit can set a lower limit.
Rates and figures shown are illustrative, subject to change without notice, and are not an approval or a commitment to lend.
Straight answers
The revolving line can be up to 65% of your home's value. Combined with a mortgage, the total of both can be up to 80%. The lender also assesses your income and credit, so your limit can be lower than your equity allows.
Not on a fixed one. Lenders usually require at least the interest each month, and you can repay any amount at any time. Without a plan to pay down the principal, though, the balance stays where it is.
Most are variable, tied to the lender's prime rate, and the lender can change the rate. Ask how the margin over prime is set before you sign, since it applies to every dollar you draw.
A HELOC suits money you will draw over time, or may not need at all. A refinance suits a set amount you want repaid on a schedule, at a rate you can lock for a term. If your current mortgage rate is low, a HELOC leaves it untouched.
Yes. A standalone HELOC doesn't need a mortgage behind it, but it needs more than 35% equity in the home.
It is paid off from the sale. The line is secured by the home, so it has to be repaid when the home is sold, just like the mortgage.
Related reading
Two worked articles on using equity, and the lump-sum alternative.
Find out how much equity and monthly savings your home supports
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Prefer the full mortgage application instead? Start standard pre-qualification