Are you looking to renovate your kitchen or go back to school? If you’re a homeowner with some equity, then you might consider taking out a home equity line of credit (HELOC). A HELOC is a low cost borrowing option (compared to unsecured debt and credit cards) since it’s secured against your home.
HELOCs are quite popular among Canadian homeowners. According to the Mortgage Professionals Canada, over 1.5 million Canadians have a mortgage and a HELOC, and about 490,000 Canadians have a HELOC and no mortgage.
Despite interest rates rising, HELOCs remain popular. HELOC balances have been growing at twice the rate of mortgages, according to a report by the CMHC.
Ready to tap into the equity in your home? Here are five steps in finding the best HELOC rates in Canada.
1. Identify your needs – what do you need the HELOC for?
Before taking out a HELOC, it’s important to identify what you need the funds for. There are several instances when borrowing money from a HELOC can make sense.
Instead of moving and incurring closing costs, a lot of homeowners are choosing to stay put and renovate their homes. Using your HELOC to pay for home renovations can make sense, as long as it increases the market value of your property. Likewise, adding an extra bedroom or second storey to your home can make sense if you can avoid moving and paying all the costs associated with it.
Debt consolidation is another popular option. Why pay 18 or 19 percent on credit card interest when you don’t have to? Why not tap into the equity in your property and pay it off at much lower HELOC rates? If you decide to do this, just make sure you put a repayment plan in place, as you’ll be no better off if you make interest-only payments.
2. Understand how HELOC rates work
A HELOC works a lot like a variable rate mortgage. However, instead of prime rate minus a discount, HELOCs are typically prime plus a premium. HELOC rates go up when a lender’s prime rate goes up and vice-versa.
Prime rate is the interest rate lenders offer to their most creditworthy clients. Prime rate typically moves in lockstep with the overnight lending rate set by the Bank of Canada. For example, if our central bank hikes the overnight by 25 basis points, lenders are likely to follow suit and hike prime rate by 25 basis points.
Your lender may also hike the premium on HELOC rates at its discretion. You can avoid a premium hike by staying in your lender’s good books. This means paying at least the minimum payment and avoiding getting in the habit of making interest-only payments for months on end.
3. Know how HELOC fees work
As with most things in personal finance, there’s no such thing as a free lunch. Similarly, HELOCs may come with fees. Here are some of the fees you may incur when taking out a HELOC.
- Administrative costs – This is the cost for setting up your HELOC. It typically costs $150-$200, although your lender may be willing to waive it.
- Legal costs – You’ll need a lawyer to do the legal work behind the scenes securing the loan against your home. This typically costs $500 to $1,500.
- Appraisal fees – An appraiser determines the fair market value of your home for the maximum amount you can borrow from your HELOC. This costs $150 to $250.
- Title search – A title search is done by your lawyer to make sure there aren’t any liens on the property. The cost is between $250 and $500.
- Inactivity fees – These fees may be charged for maintaining your account when you don’t use it for a set period of time. This varies by lenders.
- Discharge fees – When you finally pay off your HELOC, you may be required to pay discharge fees. Fees typically amount to between $200 and $300.
Understanding which fees apply to you, and who pays what, is why it’s extremely important to work with a qualified HELOC professional.
4. Understand HELOC minimum equity requirements
A HELOC can be a great way to borrow funds at a low-interest rate, but its low HELOC rates may only be available to those who meet minimum equity requirements, as well have verifiable income and strong credit.
A HELOC is typically offered to you only if you have at least 20% equity in your home and as much as 35% in urban areas (it can be even more in rural areas, if you qualify for a HELOC at all). The limit is put in place to safeguard lenders by ensuring that you have enough “skin in the game” by way of home equity.
You can typically access between 65% and 80% of your home’s appraised value with a HELOC.
5. Find the right mortgage professional
Tapping into the equity in your home all comes down to choosing the right mortgage professional to work with. By working with an experienced professional like us, you may be able to access equity from your home, even if you have bad credit or are self-employed.
A trusted professional can help ensure the process goes smoothly. Whether you’re looking to consolidate debt, do home renovations or go back to school, we’ll help you choose the HELOC borrowing option that makes the most sense for you.
We’ll look out for your best interest. We’ll also help you get the lowest HELOC rates and complete the application paperwork.
