What is a home equity line of credit?
A home equity line of credit lets you borrow against the equity in
your property. It gives you access to the repaid principal of your
mortgage loan. Over the years, you can reuse your repaid
principal for different projects.
In other words, you can keep reborrowing the payments you make on
HELOCs are often combined with “conventional” mortgage financing (i.e., loans without mortgage loan insurance offered by providers like CMHC). This means that you need a down payment of at least 20% of your home’s sale price.
Important: Credit approval is required to obtain a home equity line of credit. The HELOC cannot exceed 65% of your home’s purchase price or market value.
Example: You purchase a home for $450,000 with a 20% down
payment ($90,000). Your mortgage balance is $360,000 ($450,000 -
$90,000). The limit on your HELOC is 65% of the purchase price of the
house: $292,500 (65% of $450,000).
You can use a HELOC to access funds without having to apply for
credit again. You could use it to:
Wondering whether paying down your mortgage faster is a good idea?
→ Read our article about accelerating your mortgage payments
Who can take advantage of a home equity line of credit?
A HELOC is available to:
- People who already own a home and already have a mortgage
- People who are about to buy a property and don’t yet have a mortgage
You can apply for one:
- When you apply for a new mortgage loan
- When you refinance your mortgage
- When you renew your mortgage
Are you getting ready to buy a new home?
→ Read our article: 7 steps to buying your first home
Good to know: You may be required to pay legal and property appraisal fees.
Did you know?
It’s possible to get a home equity line of credit without a
mortgage loan. If you have a down payment equivalent to at least
35% of your home’s purchase price, the remaining 65% can
be financed using a home equity line of credit. This means that the
borrowing to finance your property would be entirely covered by the
HELOC rather than by a mortgage loan.
This can be a useful strategy, as the terms of repayment for lines of credit are often more flexible than for mortgage loans.
How do you use a line of credit?
Using a line of credit is similar to using a bank account.
You can access it via online banking, your current account or at an ABM and carry out multiple types of transactions, including one-off or regular withdrawals and deposits (transfers, bill payments, etc.).
At a minimum, it’s important to pay the monthly interest on the balance used. The best way to do this is to set up a regular payment from your bank account.
Simplify the management of your line of credit
Some financial institutions allow you to separate your HELOC into several bank accounts. You can have your salary deposited into the account, make withdrawals from it using a debit card, etc. The aim is to make it easier to keep track of the funds you’ve borrowed and repaid for different needs.
What are the advantages of a home equity ine of credit?
A HELOC allows you to borrow up to 65% of the value of your home while benefiting from flexible repayment terms. It’s a way to:
- Tap into your home equity to easily access significant liquidity
- Avoid making multiple applications for credit
- Benefit from attractive interest rates
Can you use a home equity line of credit for tax optimization?
Self-employed workers and owners of businesses or rental properties can use a line of credit as part of a cash damming strategy.
The objective is to convert interest that is not tax deductible (such as interest on a residential mortgage) into interest that is tax deductible. It’s a way of converting loan interest into business expenses and thereby optimizing the tax you pay.
Another strategy involves using your home equity line of credit to invest. In certain circumstances, depending on the type of investment chosen, the interest will be tax deductible.
For more details on this strategy:
→ Read our article about claiming interest expenses and carrying charges.
What are the risks of using a home equity line of credit?
There are two main types of risks associated with using a home equity line of credit.
- Since the interest rate is variable, the amount of your repayments can go up. That said, there are some ways to avoid this risk. Some financial institutions even allow you to protect your interest rate.
- Because a HELOC makes it easy to access funds, using this solution unwisely can lead to debts and deplete assets.
There are a few ways to reduce the risks:
- Set up regular transfers from your bank account to your line of credit to ensure that interest is paid in a timely fashion.
- Limit your access to the line of credit (e.g., avoid linking it to a debit card so that it can’t be used too easily.)
- Sign up for online banking so that you can manage your line of credit and monitor the balance and your transactions on a regular basis.
- Protect your repayments with loan insurance.
Home equity lines of credit can offer many benefits. It all depends on your financial situation and needs. Talk to our team of experts to apply for a home equity line of credit and ensure you understand all the pros and cons of this solution.
Would you like to discuss this with us? Contact your National Bank advisor or your National Bank Financial Wealth Advisor for more information. Don’t have an advisor? Make an appointment in just a few minutes.