Home Mortgage & Home Equity Line of Credit (HELOC)

Home mortgage or HELOC? Which one is right for you?

What’s the difference between a mortgage and a HELOC?

Leveraging your home’s equity to borrow funds is usually done with a mortgage. But often homeowners use a Home Equity Line of Credit (HELOC). Let’s learn more about the differences between them and determine which is right for you.

What is a HELOC?

A Home Equity Line of Credit, or HELOC, is a revolving line of credit secured against the equity in your home. Home equity is the difference between the value of your home and the outstanding mortgage amount and/or other loans secured on it. For example, if your home is worth $600,000 and your mortgage balance is $200,000, your home equity is valued at $400,000.

When comparing HELOCs, you will see that HELOC interest rates are comparatively lower than the rates for personal lines of credit. That’s because lenders have the security of liquidating your home in case you miss payments.

In Canada, your HELOC cannot exceed 65% of your home’s value, with one exception. If your lender combines your home equity line of credit limit with your mortgage, the HELOC can amount to 80% of your home’s value (with the mortgage accounting for 15%).

When you apply for a HELOC and are approved, you can utilize the funds for any legal purpose, such as home renovations, education or other financial needs. HELOCs that have an amortizing mortgage portion often come with flexible monthly payment schedules. If the HELOC is limited to a revolving loan, you are only obligated to pay the interest each month. But at any time, you can pay back as much or as little principal as you wish.

Unlike a standard refinance, you are not required to break your existing mortgage when considering a HELOC. You can often simply add one on top of your mortgage.

How do I qualify for a HELOC?

To qualify for a HELOC, however, you must:

  • Own your home
  • Have good credit (at most lenders, that means a score no lower than 680)
  • Show proof of income
  • Have reasonable debt ratios (i.e., your total monthly obligations divided by your monthly gross income should be under 40%)
  • Hold at least 20% equity in your home (and more if you want to borrow more)

What is a mortgage?

A mortgage is also a loan secured by a property. The difference between a mortgage and a HELOC is that you can’t re-borrow from regular mortgages. Once you make a principal payment with a mortgage, you must refinance to get that money back out. And that can be expensive and inconvenient.

Mortgages are secured loans, meaning they are secured by an asset which the bank can sell to pay back the loan if the borrower defaults on the payments. With either a mortgage or HELOC, that asset is the purchased property.

In terms of cost, it’s cheaper for a bank to fund a regular mortgage than a HELOC. As a result, mortgages generally have much lower interest rates.

How do I qualify for a mortgage?

To qualify for a prime mortgage, you must usually have:

  • Steady income
  • A good credit history
  • A reasonable debt ratio
  • The necessary down payment funds
Everything you need to know about HELOCs

Here are the common HELOC features that you should know before comparing interest rates.

  • You can only access up to 65% of your home's value - You are allowed to access a maximum of 65% of your home’s value through a standard home equity line of credit. Your total outstanding mortgage loan balance and HELOC cannot equal more than 80% of the value of your home.

  • Your HELOC is a revolving line of credit- When you get a HELOC, the entire credit amount is not usually loaned upfront. Instead, you can easily access the amount you need and pay only interest on the amount you withdraw.

  • You are required to make interest-only payments- HELOCs work like a personal line of credit, meaning you are only required to pay interest on your outstanding balance. And that interest is usually taken out of your bank account every month. If you want to pay off the HELOC balance in full, you can make extra payments at your own discretion. There are typically no penalties for early repayment.
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Ready to apply for a HELOC ? Here's everything you should know.

Can I pay off my mortgage using a HELOC?

Yes, you can borrow from your HELOC and put the funds towards your mortgage. Doing so allows you to replace your mortgage loan with a HELOC. That may make sense if you’re going to pay the whole thing off in less than 6-12 months.

Depending on the lender, you can also ask your bank to transfer your mortgage loan (or a portion of it) into a HELOC. If you are planning to pay down more than your permitted annual prepayment amount, a penalty may apply.

Keep in mind that if you use a HELOC to pay down your mortgage, you will probably be paying considerably more in interest. One advantage of using a HELOC to pay off chunks of a mortgage is that your monthly payments can be reduced to as low as the interest due. Regular mortgages require principal payments as well as interest. Using a HELOC to pay a mortgage, therefore, gives you some flexibility when it comes to payments.

How do HELOC payments differ from mortgage payments?

When using a HELOC, your payments generally vary. They usually increase if prime rate increases, and vice versa.

By contrast, if you have a fixed-rate mortgage, your payments remain the same. It doesn’t matter what happens to the prime rate.

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