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A home equity line of credit is a secured line of credit that allows borrowers to access funds and pay off their outstanding balance on a flexible basis. It works a lot like a credit card – you can withdraw up to your limit, and you’ll only pay interest on the amount you actually borrow. Any amount you pay toward the principal then goes back into your credit line, which means you can borrow that money again as you see fit.
A home equity line of credit is different from a regular line of credit because it lets you borrow money against the equity in your property. Your property acts as collateral for the line of credit, which means if you don’t repay the amount you borrow, your lender can repossess or sell your home to get its money back. The benefit is that your credit score will matter less when determining your eligibility for financing, and you’ll typically get lower interest rates.
There are a couple of home equity line of credit rules in Canada that define how much you can borrow against your home. These include the following:
Here’s how to figure out how much you can borrow with a HELOC:
There are two main types of home equity lines of credit in Canada. These include those that are tied to your mortgage and those that are held independently.
You’ll pay a number of different fees with a HELOC, along with variable interest rates that fluctuate in line with the prime rate of Canada.
Home equity line of credit rates in Canada are usually higher than mortgage interest rates and lower than unsecured personal loan rates. The interest on a HELOC is charged daily and is a variable interest rate that’s tied to the prime rate. The prime rate typically changes based on the Bank of Canada’s overnight rate – and it tends to fluctuate frequently, which is why your HELOC interest payments can rise sharply.
HELOC interest rates are typically shown as the prime rate plus or minus any given number. Your financial institution can change that number as they see fit, while the prime rate will be the same across Canada and will fluctuate in line with market conditions. The amount of interest you pay will depend on how much of your home equity line of credit you actually use. For example, if you have a HELOC with a $50,000 line of credit but you only spend $30,000 of your balance, then you’ll only pay interest on the $30,000 you spend.
You can use the money in a home equity line of credit for any legitimate purpose – this can include taking a vacation, renovating your home, paying bills, buying a new car or consolidating your debt. Just be aware that you’ll need to put your home on the line to get the financing you need to cover your expenses.
The beauty of taking out a home equity line of credit in Canada is that you won’t have to tell your lender why you need the funds, and you can dip into them whenever you need a top-up. Your lender will then send you your outstanding balance with interest added on and you’ll simply need to make regular payments to stay on top of your debt.
It’s not recommended that you borrow money to invest in the stock market. This is because there’s too much risk involved and you could stand to lose a substantial amount that you’ll still have to pay back. However, you can use your HELOC to invest in a rental property.
This type of property can help you to diversify your portfolio and can give you a consistent form of income in your retirement years. Just keep in mind that using your HELOC to put down a deposit on a second property can be risky, so you should be 100% sure you can make it work before you take the leap.
The following features make HELOCs a unique form of financing:
Always have a cushion of funds available in case you need to cover interest payments for a prolonged period of time. Since you don’t have to pay toward the principal balance, having money set aside for a few months to cover interest can help you if you run into financial difficulties.
Since the equity in your home is used as collateral, there’s a lot to think about when considering a HELOC. Here are some tips to keep in mind:
To apply for a HELOC, you’ll need to meet the following criteria:
To apply, compare a variety of home equity line of credit rates in Canada. Once you’ve found a potential lender, contact them to start the process. You’ll need to submit a variety of information including your personal details, information about your home and financial details to prove you can make repayments.
If you’re thinking of taking out a HELOC, you should consider the following:
A home equity line of credit is a revolving line of credit that lets you secure financing using the equity in your home. This type of lending product typically comes with lower interest rates than personal loans and lines of credit, and you may even be able to qualify with bad credit. Just be aware that if you fail to make your repayments on time, your lender can repossess the property you used as collateral to pay off your debt.
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