A home equity line of credit, or HELOC, is a type of loan that allows you to borrow money against the equity in your home like a credit card.

Whether you need funds for a renovation, debt consolidation, or unexpected expense, a HELOC can provide quick access to cash — without having to sell your home.

But before you take out a HELOC, it's vital you understand the ins and outs of this type of loan and how to choose the right vendor for your needs.

In this comprehensive guide, we'll cover:

• What is a HELOC?
• HELOC requirements in Canada
• Why should you get a HELOC?
• Advantages and disadvantages of HELOCs
• How to use a HELOC for a down payment
• 4 tips to maximizing your HELOC
• 5 HELOC providers to consider and how to pick the right one
• Costs of taking out a HELOC
• Tips for negotiating HELOC rates
• HELOCs vs home equity loans
• Tips & tricks for managing a HELOC

And much, much more. Let’s dive into it!

P.S. — looking to get started with a secured line of credit of your own? Lotly takes the guesswork out of HELOCs to ensure you get the best terms for your situation. Book a free consultation today to see if it's the right fit for you.

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Home Equity Lines of Credit explained

What is home equity?

Home equity is the amount of your home that you truly own.

In other words, it refers to the difference between your home's current market value and the amount you owe on your mortgage.

For example, if your home is currently worth $500,000 and you still owe $300,000 on your mortgage, then you have $200,000 in home equity.

How to determine your home equity

To determine the amount of equity you have in your home, you can use a simple formula:

[Market Value of Your Home] - [Amount Owed on Mortgage] = [Home Equity]

You can also use online calculators or consult with a real estate agent to get an accurate estimate of your home's current market value.

Here are some tools we think you'll find helpful:

• CIBC's Home Equity Calculator
• Zolo Home Value Estimator
• RBC Home Value Estimator

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What is a HELOC?

A Home Equity Line of Credit (HELOC), also known as a secured line of credit, is a financial product allowing homeowners to borrow money against the equity they have built up in their homes.

HELOCs are considered secured lines of credit because they use your home as collateral. Lenders typically offer lower interest rates for HELOCs than for other types of loans.

How does a HELOC work?

A HELOC works similar to a credit card. You are given access to a line of credit that you can use and pay back over time, otherwise known as a revolving source of funds.

The maximum amount you can borrow depends on:

• Your home equity
• Credit score
• Other financial factors

Unlike a traditional loan, where you receive a lump sum of money upfront, with a HELOC, you only pay interest on the amount of money you have withdrawn from your line of credit.

The only caveat? Those interest rates are typically variable.

You can generally access these funds via card, check, or online transfers.

Calculating your borrowing power with a HELOC

Your borrowing power with a HELOC is determined by the equity you have in your home and its value.

The maximum amount of money you can access via HELOC is 65% of your home's value.

(Example) If you fully own your home:

• Home value: $800,000.
• HELOC maximum amount: 65% of $800,000 = $520,000

Let's say you don't fully own your home and have an outstanding mortgage—your max HELOC calculation will be slightly different.

If you have a mortgage, the combined value of your HELOC and mortgage cannot exceed 80% of the property value. Also known as the cumulative or combined loan-to-value (CLTV) ratio, this is the ratio of your outstanding mortgage to your current property value.

In other words, if you add up your outstanding mortgage and HELOC limit, it has to be below 80% of your home value.

(Example) If you have an outstanding mortgage:

• Outstanding mortgage balance: $500,000
• Home value: $800,000
• Max amount: 80% of $800,000 = $640,000
• Amount available for HELOC: $640,000 - $500,000 (outstanding mortgage) = $140,000

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Paying back your HELOC

HELOCs typically have two periods:  a draw period and a repayment period.

1. During the draw period (usually 5-10 years), you can withdraw money from your line of credit, and your minimum monthly payment is usually just the interest on the amount withdrawn. (You can also ask to extend this period).
2. Once the draw period ends, you enter the repayment period, where you must pay back any remaining balance or convert it to a fixed-rate loan. This period is typically 20 years.

Payments tend to rise dramatically in the repayment period,  as you pay down the principal and interest on the remaining balance.

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HELOC requirements in Canada

According to the Government of Canada, you must meet specific criteria and be approved only once. Once approved, you can access your HELOC at any time.

• Equity in your home: You must have built up equity in your home to qualify for a HELOC. This could be the minimum down payment OR at least 20% equity in the property.
• Good credit score (>620): Like with any loan, having a good credit score can increase your chances of being approved for a HELOC and getting better terms and rates. Lenders will look at your credit history to assess how responsible you are with credit.
• Stable income: Lenders want to ensure that borrowers have a steady source of income to make timely payments on their HELOC. This could include employment income, rental income, or other sources of reliable income.
• Low debt-to-income ratio (40-50% max): Lenders also consider your debt-to-income ratio, the ratio of your debt payments to your gross income. A lower ratio shows you have enough disposable income to handle additional debt from a HELOC.
• If you own your home: You must provide proof of homeownership, current mortgage details (balance, term, and amortization period), and have your home's value assessed by the lender. You'll need a lawyer or a title service company to register your home as collateral.

Not sure if you qualify for a HELOC? We’ve got you covered. Book a consultation today to find out how much you can borrow.

HELOCs and the mortgage stress test

Additionally, banks require passing a "stress test" to prove you can handle payments at a qualifying interest rate, which is typically higher than your contract rate. This stress test applies even if mortgage loan insurance is not needed.

For federally regulated banks, the stress test interest rate will be the higher of:

• 5.25% or;
• your negotiated rate plus 2%.

Credit unions and non-federally regulated lenders may also use this stress test at their discretion.

Can I bypass the mortgage stress test?

Yes! The test is only for federally regulated lenders, so if you opt for a HELOC with a private lender or credit union, you won't have to face the stress test. You'll still need to pass their in-house affordability assessment, but it may be more relaxed than the federally regulated one.

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Why consider a HELOC?

HELOCs have several  advantages for homeowners, including:

• Lower interest rates compared to other types of loans
• Flexibility in borrowing and repaying funds
• Tax deductible interest payments (consult with a tax advisor for specific details)
• Ability to use borrowed funds for various purposes such as home renovations, debt consolidation, or emergencies.

It's important to note that a HELOC is still a form of loan and should be managed responsibly. Failure to make timely payments to avoid foreclosure on your home. 

Carefully consider your financial situation and consult with a financial advisor before taking out any type of loan or line of credit.

Common uses for a HELOC

Homeowners can use a HELOC for various purposes, including:

• Home renovations or repairs: A HELOC can be a cost-effective way to finance home improvement projects.
• Debt consolidation: You can use a HELOC to pay off high-interest debts, such as credit card bills, and consolidate them into one lower-interest loan. Lotly's debt consolidation services can help you out here if you're looking for a faster way to organize your debt.
• Emergency funds: Having a HELOC in place can provide peace of mind during unexpected financial emergencies.
• Education expenses: A HELOC can also cover tuition or other education-related costs.
• Investment opportunities: Some homeowners use a HELOC as a source of funds for investment opportunities, such as purchasing rental properties.

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Advantages and disadvantages of HELOCs

Benefits of a HELOC

• Flexibility: With a HELOC, you can access a revolving line of credit that you can use as needed. This gives you the flexibility to borrow and repay multiple times during the draw period.
• Lower interest rates: HELOCs typically have lower interest rates than other types of loans or lines of credit, making them an attractive option for borrowers.
• Tax-deductible interest: The interest paid on a HELOC may be tax-deductible if you use it for property renovations. Consult with a tax advisor for more information on your specific situation.

Drawbacks of a HELOC

• Variable interest rates: Unlike a traditional loan with a fixed interest rate, HELOCs often have variable interest rates that can fluctuate over the life of the loan.
• Potential for overspending: With easy access to funds, there is a risk of overspending and accumulating debt that may be difficult to repay.
• Collateral requirement: As with any secured loan, using your home as collateral means putting it at risk if you cannot make payments on the HELOC. Make sure you can afford the payments before taking out a HELOC.

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Impact of a HELOC on your credit score

Opening a HELOC can both positively and negatively affect your credit score.

Positive effects

• Increased available credit: A HELOC adds to your total available credit, which can improve your credit utilization ratio (the amount of credit you are using compared to the total available).
• Timely payments: Making timely payments on your HELOC will reflect positively on your payment history, which is a major factor in determining your credit score.

Negative effects

• Credit inquiries: When applying for a HELOC, the lender will likely conduct a hard inquiry on your credit report. This may temporarily lower your credit score.
• Potential for overspending: As mentioned previously, easy access to funds through a HELOC can lead to overspending, which may result in higher debt levels and negatively affect your credit score.

Is a HELOC right for you?

Deciding whether or not to take out a HELOC depends on your individual financial situation and needs. Consider the following factors before making a decision:

• Your financial goals: Are you looking to make home improvements, consolidate debt, or have emergency funds available? A HELOC may be a good option if your financial goals align with these uses.
• Interest rates and fees: Before deciding on a HELOC, it is important to compare interest rates and fees among different lenders. Also, make sure you understand the terms and conditions associated with the loan.
• Ability to make payments: Taking out a HELOC puts your home at risk if you are unable to make payments, just like any other secured loan. Make sure you can afford the payments before taking out a HELOC.
• Understanding of adjustable rates: As opposed to a fixed rate loan, a HELOC often has an adjustable interest rate. This means that your monthly payments can fluctuate depending on market conditions. Make sure you understand how this may affect your ability to make payments in the future.
• Your credit score: Just like any other loan or line of credit, your credit score will play a significant role in determining your eligibility for a HELOC and the interest rate you will receive. Make sure to check your credit score before applying for a HELOC and work on improving it if necessary.

Using a HELOC for a down payment

Another common use for a HELOC is as a source of funds for a down payment on a new or second home. This can be a viable option for those who have built up equity in their current home and are looking to upgrade to a bigger or more expensive property.

However, using a HELOC for this purpose comes with its own set of risks and considerations. Here are some crucial points to keep in mind:

• The potential impact on your home equity: Using a HELOC for a down payment means tapping into the equity you have built up in your home. This could reduce the amount of equity you have available to borrow against in the future. Additionally, if the value of your new home decreases, you may end up owing more on your mortgage and HELOC combined than what your home is worth.
• Interest rates and payments: As mentioned earlier, a HELOC's interest rate is typically adjustable, meaning it can fluctuate over time. This could lead to higher monthly payments, making it harder to budget for your mortgage and other expenses.

However, there are strong reasons to use a HELOC to finance a second property:

• Enter the market with more speed: Using a HELOC can help you quickly come up with the funds needed for a down payment, allowing you to make an offer on a new property sooner rather than later.
• Lower interest rates: Depending on your financial situation and credit score, using a HELOC for your down payment may result in lower interest rates compared to other borrowing options.
• Avoid mortgage default insurance: This is typically required for those putting less than 20% down on a property. Padding your down payment with a HELOC can help you avoid this additional expense.

Before using a HELOC for a down payment, carefully weigh the potential risks and benefits. Consult with a financial advisor or mortgage specialist to determine if this is the right option for you. Additionally, thoroughly research different lenders and compare rates and terms before making any decisions.

Does the math make sense? Here's how to proceed:

1. Check your credit score and debt-to-income ratio. Before considering a HELOC for a down payment, make sure to check your credit score and calculate your debt-to-income ratio. This will give you an idea of where you stand financially and whether or not using a HELOC is a viable option.
2. Shop around for the best rates. As mentioned earlier, HELOC interest rates can vary significantly between lenders. Do your research and shop around for the best rates and terms that fit your financial needs.
3. Have a repayment plan in place. It's crucial to have a solid repayment plan in place before using a HELOC for a down payment. This may include setting aside additional funds each month to pay off the borrowed amount or having a timeline for when you plan to sell your home and use the proceeds to pay off the HELOC.
4. Monitor interest rates. Since HELOCs have adjustable interest rates, keep an eye on market trends and consider refinancing if necessary. This can help you secure a lower interest rate and potentially save money in the long run.

By following these steps and carefully considering the risks and benefits, using a HELOC for a down payment can be a viable option for some homebuyers. Don’t have the time to shop around? You can chat with experts at Lotly (for free) to see if a secured line of credit is right for your situation — we work with over 50 lenders to find you the best rate possible. 

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4 tips for maximizing your HELOC

Now that you understand the basics of using a HELOC for a down payment, here are some tips to help you make the most out of this financial tool.

1. Only borrow what you need: It can be tempting to take out more money than necessary when utilizing a HELOC, especially if you have a high credit limit. But never forget: you should only borrow what you actually need and can comfortably repay.
2. Keep track of your spending: It's important to monitor how you're using the funds from your HELOC and ensure they are being used for their intended purpose. This can help prevent overspending and ensure that you have enough funds available to pay off the borrowed amount.
3. Plan for repayment: As mentioned before, having a solid repayment plan in place is crucial when using a HELOC for a down payment. Make sure you have a clear timeline and budget in place to pay off the borrowed amount within a reasonable timeframe.
4. Use your HELOC to invest: If you have a good understanding of the market and some financial savvy, using your HELOC to invest in other assets can be a smart move. However, it's essential you carefully consider the potential risks and consult with a financial advisor before making any investment decisions.

Now that you know how to make the most of your HELOC, let’s see which financial institutions have the best offerings.

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5 HELOC providers to consider

CIBC

• Best For: Simple to understand and use.
• Minimum Draw: $10,000
• Cost: 6.70%
• Online Application Process: No
• Description: CIBC’s HELOC is a no-frills offering with an understandable structure and competitive interest rates — hard to go wrong here.

RBC (Royal Bank of Canada)

• Best For: Comprehensive access option.
• Minimum Draw: $5,000
• Cost: 5.69% to 6.52% APR, fixed or variable.
• Online Application Process: Yes
• Description: RBC offers flexibility with various access methods such as online banking, mobile app, ATMs, and branches.

TD Bank

• Best For: No minimum draw requirement.
• Minimum Draw: N/A
• Cost: Starting from 7.45%
• Online Application Process: No
• Description: TD Bank provides a HELOC with flexible terms and competitive rates that are suitable for various financial needs, like charge-free prepayment options. You'll get an automatic 0.25% rate discount if you're a checking customer.

Scotiabank

• Best For: Versatile product configurations.
• Cost: Starting from 7.45%
• Online Application Process: Yes
• Description: Scotiabank offers STEP, a flexible body of line of credit products that you can optimize to best fit your needs. You can set segments of fixed rate repayments to protect against rising interest rates.

BMO (Bank of Montreal)

• Best For: Easy HELOC protection options.
• Minimum Draw: $5,000
• Cost: Prime rate (ranges between 4.84 - 6.51%) + an adjustment factor based on your situation.
• Online Application Process: No
• Description: BMO is a trusted provider that offers transparent options for your HELOC, allowing you to have consistent payments and budget accordingly.

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It’s worth mentioning: Canada’s big five banks may offer the best rates, but they’re notoriously difficult to qualify for. As financial products, they’re mainly for prime borrowers. For those seeking alternatives, other reputable lenders Meridian, Home Trust, Equitable, MCAP, and more will provide the same services.

If that seems like a lot to navigate — you’re right, and we get it. You can instead decide to work Lotly: we work on your behalf to find the best lender for you, so you don’t have to worry about the legwork of approaching them individually.

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How to pick the right HELOC provider for you

When considering a HELOC, remember to evaluate and compare different providers to find the best fit for your financial needs. Here are some key factors to consider when choosing a HELOC provider:

• Interest rates: Compare interest rates among different providers to find the most competitive option. A fixed-rate HELOC may have a higher interest rate than a variable-rate HELOC but will offer more stability in the long term.
• Flexibility: Consider whether the provider offers flexible repayment options, such as fixed-rate segments or early repayment without penalty.
• Maximum amount and loan-to-value ratio: Determine how much you need to borrow and ensure the provider can accommodate your borrowing needs based on their maximum amount and loan-to-value ratio limits.
• Approval process: Find out how long it will take for the provider to approve your HELOC application, as this can vary among different lenders.
• Online application: If convenience is important to you, look for providers that offer an online application process.
• Customer service and support: Research reviews and ratings from other customers to gauge the provider's customer service and support quality.

Ultimately, the best HELOC provider for you will depend on your specific financial situation and needs. Take the time to thoroughly research and compare different options before making a decision.

Costs associated with HELOCs

While a HELOC can be a valuable tool for accessing home equity, you should understand the costs involved. Here are some standard fees and charges associated with a HELOC:

HELOC setup

• Origination fee: This is the fee the lender charges for processing your HELOC application, typically between 0.5% and 1% of the total loan amount.
• Appraisal fees: If you need to determine the value of your property, expect to pay between $150 and $250 to a professional appraiser.
• Application fees: Some lenders may charge a flat fee or percentage of the credit line for processing your application, which may be between $100 and $200.
• Title search and insurance: A title search is typically required to ensure there are no liens on your property, and it can cost around $250 to $500. Title insurance protects both you and the lender in case of any issues with the title and is usually $250.
• Credit report fee: Lenders may charge a fee for pulling your credit report during the application process, often between $20 and $100.

Maintenance fees

• Annual fee: Some lenders charge a yearly maintenance or service fee for keeping your account open, and could be around $50 - $100/year.
• Interest payments: You will have to make monthly interest payments on any amount borrowed.
• Early termination fee: Some lenders may charge a fee of up to $500 if you pay off your HELOC early.
• Inactivity fees: Some lenders may charge an inactivity fee if you don't use your HELOC for a certain period of time, commonly $100 per year inactive.

When choosing a HELOC provider, carefully consider these costs and factor them into your decision. Additionally, be sure to ask the lender about any other potential fees or charges that may not be listed above.

Understanding the full cost of borrowing with a HELOC can help you make an informed and responsible financial decision.

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Tips for negotiating your HELOC rates

Make sure you negotiate your rate, even if it's with a bank. Here are some tips to help you get the best deal possible on your HELOC rates:

• Do your research: Compare rates from multiple lenders to see who can offer you the best terms.
• Know what you want: When discussing terms with a lender, don't hesitate to negotiate for a lower interest rate or fees.
• Consider relationship-based pricing: Some lenders may offer lower rates or fees if you have a strong existing relationship with them, such as having an existing account or mortgage with them.
• Improve your credit score: A higher credit score can often lead to better rates, so take steps to improve your credit before applying for a HELOC.
• Understand your limits: If you don’t qualify for a specific product, it’s not the end of the world. Keep an open mind and look for a lender who will work with you.

By being proactive and doing your research, you can save thousands of dollars over the life of your HELOC. Remember that negotiating is always an option, and you should never settle for terms not in your best interest.

HELOCs vs home equity loans

While both HELOCs and home equity loans allow homeowners to access the equity in their homes, there are some key differences between the two.

• A home equity loan is a lump sum of money borrowed against the value of your home, repaid with fixed monthly payments.
• A HELOC acts more like a credit card. You can borrow money as needed up to a predetermined limit. You only pay interest on the borrowed amount, not the total credit limit.

Additionally, while a home equity loan typically has a fixed interest rate, a HELOC's interest rate can fluctuate based on market conditions.

Alternatives to home equity loans

If you're uncomfortable with the idea of borrowing against your home or don't have enough equity built up, there are alternative options for accessing funds. Some alternatives to home equity loans include:

• Personal loans are unsecured loans that can be used for various purposes, including home renovations or debt consolidation.some text
  • Best For:  Borrowers with good credit and a stable income.
  • Pros: Personal loans typically have fixed interest rates and terms, making it easier to budget for payments.
  • Cons: Interest rates may be higher than home equity loan rates, and the maximum loan amount may not be as high.
• Credit cards: If you have a strong credit score, you can use credit cards to finance home renovations or other expenses. Keep in mind that carrying a balance on your credit card can quickly add up in interest charges.some text
  • Best For: Borrowers with excellent credit and the ability to pay off their balance in full each month.
  • Pros: Can be a convenient and flexible option for financing smaller projects or expenses.
  • Cons: Interest rates can be high, and if you cannot pay off your balance in full each month, your debt can quickly grow.
• Cash-out refinancing: This involves replacing your current mortgage with a new one that has a higher loan amount. The difference between the old and new loans is given to you as cash, which you can use for home improvements or other expenses.some text
  • Best For: Homeowners with good credit and equity built up in their home.
  • Pros:  Can provide access to a large amount of funds at potentially lower interest rates than other options.
  • Cons: Closing costs and fees associated with refinancing can be expensive, and you may end up with a higher monthly mortgage payment.

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Tips & tricks for managing a HELOC

• Keep an eye on interest rates: HELOCs typically have adjustable interest rates, so it's essential to monitor market trends and be prepared for potential rate increases. If you are concerned about rising rates, consider converting your HELOC into a fixed-rate loan.
• Stay organized: Track all expenses made using your HELOC and stay within your credit limit. This will help prevent overspending and ensure that you have enough funds available for any necessary payments or emergencies.
• Consider paying more than the minimum payment: As with any loan, paying more than the minimum required can help you pay off your debt faster and save on interest charges.
• Be cautious when using a HELOC for debt consolidation: While consolidating high-interest debt with a lower interest rate HELOC can save you money on interest, it's essential to address the underlying issue of overspending and avoid falling into the same debt cycle. Make sure to have a solid plan in place for paying off your consolidated debt before taking out a HELOC for this purpose—at Lotly, we'll help you consolidate your debt responsibly.
• Consider seeking professional advice: If you are unsure about whether a HELOC is the right financial choice for you, consider consulting with a financial advisor or mortgage specialist. They can provide personalized guidance based on your individual financial situation and help you make an informed decision.

Overall, a HELOC can be an invaluable tool for managing expenses and achieving financial goals, but it's crucial you use it responsibly and carefully consider all factors before taking one out. With proper planning and budgeting, a HELOC can offer flexibility and convenience without causing unnecessary debt and financial strain.

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Get a secured home line of credit today with Lotly

Let's go over some key takeaways from this guide:

• A Home Equity Line of Credit (HELOC), or secured line of credit, allows homeowners to borrow against their home's equity with flexible access and typically lower interest rates than other loans.
• To qualify for a HELOC, you need at least 20% equity in your home, a good credit score, stable income, and a reasonable debt-to-income ratio.
• Combining a HELOC with a mortgage, known as a readvanceable mortgage, merges a revolving line of credit with a fixed-term mortgage, offering flexible credit limits based on home equity.
• Banks require passing a "stress test" for HELOC approval, ensuring borrowers can handle payments at a higher qualifying interest rate.

Want to make sure you're getting the best HELOC terms in Canada? Here at Lotly, we work with 50+ lenders to find the most competitive rates and terms tailored to your financial situation. Get a free consultation today and explore your options for a secured line of credit!

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Frequently Asked Questions

When is a HELOC a bad idea?

A HELOC may not be a good idea if you are unsure about your ability to repay the loan or have a history of overspending and accumulating debt. Using a HELOC for non-essential expenses or investments can also be risky and potentially lead to financial difficulties. Consulting with a financial advisor can also help you determine if a HELOC is the right choice for you.

What is the monthly payment on a $50,000 HELOC?

The monthly payment on a $50,000 HELOC will vary depending on the interest rate and loan term. However, for a 5-year loan term with an interest rate of 4%, the monthly payment would be approximately $927. Keep in mind that this amount does not include any additional fees or charges that may be associated with your HELOC. Review all terms and conditions before taking out a HELOC to understand the cost and potential risks involved fully.

What is the monthly payment on a $100,000 home equity loan?

Firstly, it’s important to note the difference between HELOCs and home equity loans. HELOCs are revolving lines of credit, much like a credit card. Home equity loans are provided in lump sum amounts. 

The monthly payment on a $100,000 home equity loan depends on the interest rate and loan term. For example, with a 10-year loan term and an interest rate of 5%, the monthly payment would be approximately $1,060. However, note that this amount does not include any additional fees or charges that may apply.

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