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A home equity line of credit (HELOC) is a revolving account that lets you borrow against your home equity at will. The lender secures it against your home, which is often why they’re called secured lines of credit (SLOCs).
The repayment terms are fully open, meaning that you can repay up to 100% of the loan in a lump sum payment anytime. The monthly payments generally consist of interest only, and the interest rate varies with the prime rate.
When shopping for any financial product, whether it’s a mortgage, credit card or a HELOC, it’s crucial to compare rates in order to get the best value possible.
There’s no downside to switching financial institutions if you find one offering mortgage and/or HELOC terms that are superior to your existing lender. However, it’s important to do the math first to ensure the move makes financial sense once you factor in fees and mortgage breakage penalties.
Mortgage rate comparison websites, such as RATESDOTCA, have tools to help you evaluate HELOC rates being offered by the major financial institutions in Canada. This helps you contrast different offers in as little as five minutes.
Pros
Cons
Perhaps the biggest benefit of a HELOC is its flexibility. That’s what makes them so popular.
HELOCs offer attractive borrowing rates for large sums of money—up to 65% of your home’s value. If you use a credit union or lock part of the HELOC into a regular mortgage, you can borrow up to 80% of the home’s value.
Rolling other debt into a secured credit line is an effective way to reduce interest costs on higher-interest borrowing, particularly credit cards. And it can also serve as:
The best value changes every few months or so. In early 2020, for example, Tangerine emerged as the most competitive SLOC lender in Canada. Tangerine held on to the title of lowest HELOC rate through the COVID-19 lockdown, with its rate dipping down to just 2.35% (prime – 0.10%).
That’s the first time in years that Canada saw a widely advertised HELOC rate under prime rate. It’s also well below average big bank HELOC rates, which are commonly priced at prime + 0.50%, or 60 basis points higher. (One basis point equals 1/100th of a percentage point.)
HELOC rates are based on two things:
a) Prime rate
b) The lender’s premium or discount to prime rate
Prime rate generally changes when the Bank of Canada increases or decreases its overnight target rate. That happens when the Bank of Canada needs to stimulate or slow the economy to meet its 2% inflation target.
The premium or discount changes based on the lender’s profit and market share objectives, as well as its cost of funds. Amid economic crises, for example, mortgage funding markets often become illiquid and lenders must pay more for capital. They in turn charge more for HELOCs by increasing the premium to prime rate, as they did in 2008, for example.
Lenders source HELOC funds mainly from deposits and other short-term money-market instruments. HELOCs are generally not securitized (sold to investors) because they cannot be default insured. Lack of available default insurance increases the yields investors demand, making it too costly to fund most HELOCs via securitization.
Predictions for HELOC rates generally follow forecasts of prime rate, which in turn correspond to projections of the Bank of Canada’s overnight rate. With the economy emerging from recession in 2020, economists expect that prime rate, the overnight rate and HELOC rates will all remain near long-term lows through 2022. For more information, please refer to our prime rate page.
For seniors in need of funds and contemplating whether to get a reverse mortgage or a credit line, here are a few best practices for those who opt for the HELOC:
In recent years, HELOC usage has risen to levels that regulators deem concerning. Canadian banks responded by tightening lending criteria. For example, it’s now common to approve borrowers based on them theoretically using the full amount of their HELOC limit, even though there may be no borrowing at the time of closing.
In other words, despite having a zero balance, a bank will assume you’ll use all of your credit and test your ability to carry those theoretical interest costs.
The bank will also generally apply a theoretical payment based on a 25- or 30-year amortization, and make sure you can afford it—again, assuming you maxed out the HELOC.
Here’s a collection of recent statistics on Canadian HELOCs:
(Sources: Mortgage Professionals Canada and FCAC)
