What is home equity?
Home equity is the difference between your home’s current market value and the amount you still owe on your mortgage. It grows as you make your regular payments, and as your home’s value rises with the market or with improvements you make.
What is a HELOC?
A HELOC is a revolving line of credit secured by your home. You can borrow, repay and borrow again, up to a set limit, and you only pay interest on what you use. Because it’s secured, you can usually borrow more, at a lower rate, than with a personal loan or credit card.
Why Penticton homeowners use a HELOC
- Debt consolidation: Replace high-interest loans and credit cards with one lower-interest balance.
- Home improvements: Fund a kitchen, flooring or other upgrades that can also add value to your home.
- Lower interest: HELOC rates are usually well below credit card and personal loan rates.
How HELOC rates work
HELOCs have a variable rate, usually set at the lender’s prime rate plus a margin. When prime changes, your rate and minimum payment change with it, so it’s worth keeping an eye on rate trends.
How much can you borrow?
In Canada, your mortgage and HELOC combined can’t exceed 80% of your home’s value, and the HELOC portion on its own can’t exceed 65%. To estimate your maximum:
- Take your home’s current market value.
- Multiply it by 80%.
- Subtract your existing mortgage balance.
The result is roughly what you could access, keeping the 65% limit on the HELOC portion in mind.
Is a HELOC right for you?
A HELOC is flexible and usually low-cost, which makes it a strong tool for renovations, debt consolidation or large expenses. But because your home is used as collateral, you could risk losing it if you fail to make payments, so make sure you can repay what you borrow. I’ll help you set the right limit and compare it with a refinance.
Home equity line of credit: common questions
Do I pay interest on the full HELOC limit?
No, only on what you’ve actually drawn. If your limit is $100,000 and you’ve used $20,000, you pay interest on $20,000. The rate is variable and tied to prime, and the minimum payment is usually interest only, so a HELOC costs nothing to have and only costs something when you use it.
Can I add a HELOC to my existing mortgage?
Often, yes. Some lenders will add one behind your current mortgage, and some mortgages can be converted to a combined mortgage and line of credit. The total of both is capped at eighty percent of your home’s value, with the line of credit portion capped at sixty-five percent. Whether it makes sense depends on your current lender and rate.
What’s the difference between a HELOC and a refinance?
A refinance gives you a lump sum at a fixed or variable rate, paid down on a schedule. A HELOC is a revolving limit you borrow from and repay as you like, at a variable rate. If you know the amount you need, a refinance is usually cheaper. If you want flexibility, or the money is for projects over time, a HELOC fits better.
Written by Alex Thomson, independent mortgage professional
