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Home Equity Line of Credit – HELOC


The Canadian mortgage market offers a variety of mortgage options to borrowers. Some of them are quite well-known and frequently discussed. Here, you will come to know about one more lending option that is known as HELOC or Home Equity Line of Credit.

Home Equity Line of Credit

This is actually a different kind of loan from the conventional home loan. In this method, a borrower is only permitted to receive a limited amount of borrowing against their home or real estate property as collateral. The amount that is lent to the borrower is pre-determined by the Canadian mortgage lender. This method is similar to that of a credit card as it has a revolving nature. It is very beneficial for homeowners as they can use this option when they are in dire need of credit and can draw money as and when required.

The Term for a HELOC

The HELOC comprises of a drawing period and a repayment period. You can draw as much as you want during the first 5-10 years while staying under your limit and make interest payments on the amount you draw. You can then repay the amount borrowed in the next 10-20 years. The average total term of a HELOC lasts for about 25 years.

Interest Rate on a HELOC

The interest rate on a HELOC is set using the prime rate and the average daily balance as well as the margin allocated by the lender. Lenders usually offer HELOCs to borrowers on an introductory rate which consists of a prime rate and zero margin. The rate is sometimes even less than prime; however, this tends to increase after the initial period of the loan.

If you are considered a high-risk borrower, the margin and the prime rate together could be quite high which may force you to reconsider borrowing.

Method of Repayment

After the initial drawing period is complete, you can repay the entire principal amount of the loan using the monthly payment method or in the form of a balloon payment. However, some HELOCs do not have a specific repayment period for the loan so a Canadian mortgage borrower may have to make the complete payment at the end of the draw period.

HELOCs Can Be Used as a Second Mortgage

As a borrower, you may use HELOC as a line of credit or a backup for an existing Canadian mortgage. You may use it as a source of paying other revolving debts like credit cards or home improvement costs. Many borrowers prefer getting a HELOC as it has a lower interest rate and is much more flexible in comparison to a standard credit card.

HELOC as a First Mortgage

Those borrowers that have to arrange for money quickly to purchase their house but are in a good financial position can even opt for HELOC as a first mortgage. This is quite an uncommon incidence and is very risky so it should only be taken as an option if you are able to afford it.

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