In its simplest form, a HELOC works somewhat like a credit card. You can borrow money up to a certain credit limit set by the lender and then pay back the borrowed amounts along with interest. This option can offer more flexibility, you can even withdraw and make payments on a daily or weekly basis, if necessary. In other words, HELOC is a revolving credit line that is secured by the equity you have built up in your home. A HELOC, unlike a traditional line of credit, allows you to borrow against your equity at a much lower interest rate. You will have access to a pre-approved amount of cash within your mortgage if you get a mortgage with a HELOC feature. You will have to pay interest on the money you borrow from a HELOC if you use it, on top of your usual mortgage payments, you will have to pay interest on it.
What is a HELOC used for?
You can use HELOC funds at your discretion for renovations, debt consolidation, higher education, or anything else you need. Just remember that the HELOC is secured by your home and cannot exceed 65% of your home’s value.
Where and how can I access a HELOC Mortgage?
You can get a HELOC through the bank or credit union that has financed your mortgage. Your lending institution will run some simple calculations to determine what your home equity is, how much you can borrow, and by extension, what interest rate you pay.
How do I pay off a HELOC?
As stated earlier, HELOCs are a type of revolving credit loan. Your lender charges a small daily interest rate to any balance you borrow. You will make these interest-only payments on a month-to-month basis. Your bank will normally automatically deduct this amount from your account on a set day each month.
How do you pay interest on a HELOC?
You may use as much or as little of the HELOC as you like, and you only pay interest on the amount you have taken out. A variable rate linked to Prime is used to calculate interest daily. HELOC rates, on the other hand, are frequently higher than variable mortgage rates, and the link to Prime can potentially alter at any moment at your lender’s discretion.
Potential changes to current and future HELOC terms
A HELOC is a wiser option to high-interest credit cards since it allows you to borrow up to 65 percent of your home’s worth (excluding the balance mortgage amount). A HELOC might provide you access to up to 65 percent of the value of your property if you do not have any other liens on it. With this revolving credit arrangement, you may continue to benefit from your home’s equity appreciation while only paying interest on the amount you borrow, as and when you need it. According to the Financial Consumer Agency of Canada (FCAC), all federally regulated lending institutions (basically Canadian banks) can adjust current HELOC arrangements, including some major changes.
- Interest rates: While HELOC interest rates are often lower than those for other forms of loans, they fluctuate depending on the prime lending rate (PLR) and the markups of specific banks. The lending bank can continue to raise HELOC interest rates if they give adequate warning. A big rate increase might put you in a tight place with your monthly interest payments, as well as disrupt your plans for principal payments.
- Credit limits: Your lending bank has the option to revise your credit limits at any time. Usually, the revised limit could be set at, or just above the current balance that you owe on the HELOC, especially in the event of missed payments. As an extreme measure, the banks can revise the limits to below your current balance. In such a scenario, you will be liable to repay the differential between your new approved credit limit and your existing balance within a specified timeline. In this case, you will be responsible for repaying the difference between your new authorized credit limit and your current debt within a certain time frame.