Canada has one of the highest homeownership rates in the world. In some cities like Calgary, over 70 percent of residents are homeowners. According to CBC News, in 2018 about 6 million Canadians had a mortgage and 3 million Canadians had a home equity line of credit or HELOC. About 1.5 million Canadians have both a mortgage and a HELOC.
What is the difference between a mortgage and a HELOC?
Mortgages are home loans that are offered at either fixed or variable rates with terms between 5 and 25 years. Most Canadian mortgages have five-year interest rates, but some are available at ten-year rates. The loan-to-value rate (LTV) for a mortgage can't be more than 95 percent for home purchases. If you are refinancing a current mortgage, the maximum LTV rate is 80 percent. In 2018, 68% of Canadian mortgages were traditional fixed-rate, and 32% had variable or adjustable rates.
A HELOC or home equity line of credit is also based on home value and can be used for home purchase, combined with a traditional mortgage, or used as a stand-alone credit product. The maximum loan-to-value rate for a HELOC is 65 percent of a home's purchase price or market value. Unlike a mortgage, you can pay off a HELOC and re-use it for another purpose up to your maximum credit limit. A HELOC is a form of revolving credit.
Which is better: a mortgage or a HELOC?
It depends on your needs and home buying circumstances. If you're buying a home for the first time, a mortgage is probably the best option for two reasons. First, mortgage interest rates are usually lower than HELOC interest rates. Second, it's possible to finance a home purchase completely with a HELOC, but you will need to have a 35 percent down payment because a HELOC can't be more than 65 percent of the home's purchase price or value.
A HELOC may be preferable to a mortgage if you would like to use the line of credit flexibly. Although most HELOC interest rates are a bit higher than mortgage rates, you aren't required to pay off the principal and interest on a fixed schedule every month like a mortgage. You can even opt for interest-only payments to provide optimal flexibility. If you can provide a higher down payment on a home and want to have flexible payments, you could opt for a HELOC instead of a mortgage. You could also combine a traditional mortgage with a HELOC to provide additional flexible payment options.
HELOCs rarely have any penalties for paying the balance owed, but this isn't the case with mortgages. A closed mortgage may have penalties of between 10% and 20% if you pay it off early. An open mortgage does not have penalties, but it may also come with a higher interest rate.
If you're making a traditional home purchase and have the traditional amount of 20 percent to put down on a home and low-interest rates are your priority, a mortgage is likely your best choice. If you have flexible financial plans and would like a "rainy day" fund, a HELOC or a combination of a HELOC and a traditional mortgage may be a better fit.
Investigate mortgage and HELOC rates with Rates.ca's comparison tool to find your home financing choices today.
