What the heck’s a HELOC?

Thinking about renovating your home or buying an investment property? If you’ve owned your home for a few years, you have access to your home equity: you can borrow against it to pay for that new kitchen you’ve always wanted or to put in a basement apartment or garden home. You can use your equity to invest in an additional property, or even pay for a child’s education, consolidate high-interest loans, and more. 

A HELOC – short for home equity line of credit – is the vehicle that lets you do that. Basically, it’s an open line of credit that’s secured by your home, cottage, or rental property.

“A HELOC is great because it’s a revolving line of credit,” says James Harrison, Mortgage Broker at Mortgages.ca. “You can take out money and put it back as you please, and there’s no set amount you have to pay back every month: you only have to cover the interest, which can be great for cash flow when you need it. And since it’s secured against your home, it’s the cheapest revolving credit you can get.”

How much can I borrow with a HELOC?

That depends on how much you still owe on your mortgage. The max line of credit you can get is 65% of the value of your property, 80% if it’s combined with a mortgage. So if you have a $500K mortgage, and you’ve paid down $250K, it means you have access to the remaining $250K to borrow. If your property’s value has appreciated since you were initially approved for the HELOC, you can talk to your lender to refinance so you can use that additional equity. For example, let’s say you own a house worth $1M and you owe $250K. You can set up a new global limit of $800,000 (or 80% of the value of your house): $250K in the mortgage and $550K available in the home line, which you can access instantly, as you please.

A HELOC can give you a lot of control

Once you’re approved, you have instant access to low-interest credit whenever you need it, and you pay it back on your own terms. James recommends getting a HELOC as soon as you can: you only have to qualify once, and it never goes away as long as you own your property. Borrowing rates for HELOCs can range from prime plus 0 to prime plus 1 on average, and most have no monthly cost.

Get one before you become self-employed or retire

If you’re currently a salaried employee and you’re thinking about starting your own biz, applying for a HELOC while you’ve still got the full-time gig and are getting a regular pay stub can be a good idea, as you may no longer qualify for the loan when you’re self-employed (especially in the first two years of being self-employed).

But, if you qualify for it before you strike out on your own, you’ll still have access to the money. Some entrepreneurs even use their HELOC to start their businesses, which is much easier and more flexible than going to a bank and asking for a business loan.

Read more: How do I get a mortgage if I’m self-employed?

James also recommends getting a HELOC before you retire – even if you don’t need the money for anything right now. “Once you no longer have the income to qualify for the loan, your only option will likely be a reverse mortgage, which generally has terms that aren’t nearly as favourable,” he says.

The downside: without planning ahead, you could end up owing a lot of money

When using money from your HELOC, your best bet is to only take out the funds you need and pay off as much as you can. Otherwise, you could end up accruing a lot of interest – and owing more on your home than you’re comfortable with. Making a repayment plan and sticking to it as much as you can is ideal.

What’s the difference between a regular line of credit and a secured line of credit like a HELOC?

A regular LOC is based solely on income and liability: it’s not secured against an asset. You won’t be able to borrow nearly as much (usually $10k to $50K or so), and the interest rate is much higher since the risk to the lender is greater.

Read more: 5 ways to build credit and buy your first place

How long after buying a property can I get a HELOC?

That completely depends on how much you initially put down. Say you’re buying a $1M home and you have a 25% ($250K) down payment. That means you still owe 75% ($750K). Since the total amount you can access is 80%, you could potentially borrow 5% ($50K). A 20% down payment, on the other hand, means you won’t have access to credit until you pay down some of the principal.

$1,000,000

-$250,000

---------------

$750,000

+$50,000 available HELOC

James recommends getting an “integrated” line of credit if your lender offers it. As you pay off your loan, your available credit grows, so every dollar you pay towards the principal is a dollar you’ll be able to borrow.

Investors take note: with a HELOC, you can borrow your down payment

Another nice thing about a home equity loan is that you can use it to put money down on a second property. Lenders require that a percentage of your down payment come from money that isn’t borrowed: You have to put 20% down for an investment property, 5% for properties under $500K, and 10% for those over $500K must be money you already have.

If you’re borrowing money that’s secured by an asset (like your home), that falls in the “money I already have” category and can be included in the minimum. It’s a great option for investors: you can borrow against one property to buy another one without having to save up a huge down payment.