A HELOC, or Home Equity Line Of Credit, is a simply a line of credit that is registered against your home. It can also be referred to as a SLOC (Secured Line Of Credit). It allows you to draw equity out of your home when you need it. 

There are two notable benefits of having a secured line of credit over a personal line of credit (PLOC).

  1. Higher limit

  2. Lower rate

Since a HELOC is backed by your home’s equity, lenders face lower risk which enables them to approve you for a larger amount at a reduced rate.

 

HELOC vs Mortgage

Some people will tell me that they are mortgage free, but then later tell me that they have a HELOC with $500,000 owing on it. But a HELOC is still a type of mortgage. If there is money owing against your home, then you are not mortgage free.

As a HELOC is a type of mortgage, the title of this section is tantamount to asking about the difference between a fern and a plant. A fern is a type of plant of course. Just like a HELOC is a type of mortgage. I chose this subtitle as it’s in line with how many people think.

A mortgage can be defined as a loan secured by real estate. That’s it. And that’s exactly what a HELOC is. A loan secured by real estate.

The difference is that one is amortized, while the other is not.

An amortized mortgage has payments that are split between principal and interest over a specific time period, most often 25 or 30 years. As the mortgage is paid down, you build equity in the home. However, you cannot re-access that equity without either refinancing, or adding a HELOC. 

A HELOC is a revolving account, which means that you can re-access the funds at any time. There is no set amortization period as the minimum payment covers interest only.

So why doesn’t everyone get a HELOC then?

The biggest reason is that an amortized mortgage will have a lower rate, usually much lower. In fact, the difference can be as much as 1.50% or even greater.

While that sounds expensive when comparing it to the traditional amortized mortgage, the rate on a HELOC is often 2.00% – 4.00% lower than an unsecured line of credit… not to mention, you can get access to a lot more funds. That is, providing you have enough equity in the home to allow it.

 

Shopping Around for a Lower Rate on a HELOC

HELOCs are not competitive products for the most part as lenders are not climbing over each other to beat out their competition. It’s more of a convenience than a major profit source for the lender. You could try shopping around for the best rate on a HELOC, but you’re not going to get too far… especially if you are looking to add one behind a mortgage that is already in existence. In this case, options are quite limited. In fact, there are few lenders that will offer a HELOC behind the mortgage of another lender…if they offer them at all. You’ll generally be looking at a rate of prime +0.50% at best. This has been fairly consistent over the years. It was prime +0.50% ten years ago and will likely be the same ten years from now.

 

Adding a HELOC at Time of Purchase

HELOCs are primarily offered through major banks and credit unions, with the odd exception. This means that you’ll be more limited in options, which may result in a higher rate on the amortized portion than what you could find if you were to forgo the HELOC.

When adding the HELOC at the time of purchase, it would generally be registered together with the mortgage as part of the same charge. Simply put, a charge is another way of saying registration. It’s what secures the loan to your home. This means that you have only one mortgage registered towards your home, but with two components. The term portion (amortized) and the revolving portion (HELOC).  

A free standing HELOC cannot exceed 65% of the property’s value (referred to as 65% Loan to Value or LTV). But when adding it to a traditional amortized mortgage, the two together can go up to a maximum of 80% LTV. 

In situations where you have a down payment of 20%, the HELOC limit would start off at zero or $1 (depending on the lender), and then auto increase as the mortgage is paid down. This is commonly referred to as a re-advanceable mortgage as you can re-access the equity as the mortgage is paid down.

For example, let’s say $2,000 of your first mortgage payment is applied to principal, therefore increasing your equity by the same amount. This means that your HELOC limit will increase, but not by the full $2,000. The exact number can vary depending on the lender, but will generally be for around 75% of the principal payment. This would continue to grow with every payment thereafter.

 

Adding a HELOC Separately

If there happens to be another lender with a lower rate who does not offer HELOCs, than you can still process the amortized mortgage with the lower rate lender. You can then add a HELOC separately after closing which would be done with a different lender. This option is only available when you have a down payment greater than 20% as the HELOC limit cannot exceed 80% of the home’s value, as mentioned above. The only exception is if you are closing on a new build purchase where the value has increased beyond the purchase price at time of closing.

Adding a separate HELOC will mean that you will have two separate mortgages on the property.  The first being the amortized loan. The second being the HELOC.

 

There are five notable drawbacks to this:

 

  1. The limit will not auto increase as the mortgage is paid down.
  2. You have to go through the application process a second time (Identical to applying for a traditional mortgage)
  3. When you sell the home, you’ll have a 2nd discharge fees. One for breaking the amortized mortgage and one for the HELOC. (Discharge fee in Ontario is usually around $300-$400 per charge. In BC it’s usually $75, and in Alberta and Quebec it’s $0).
  4. Additional costs.  As a second mortgage must be registered, there is an additional cost which can top $1,000. However, there are generally options to bring this cost down substantially.
  5. There are limited options as most lenders will not issue a HELOC behind another lender’s mortgage, if they offer them at all.

 

Collateral Mortgages

Anytime a mortgage has multiple components (such as amortized mortgage + HELOC), it will be registered as a collateral charge vs. a standard charge, regardless of lender. The same applies if registering a stand-alone HELOC.

With a standard charge mortgage, you can transfer it to another lender at the end of your term without any additional cost*.  With a collateral mortgage, there is also a legal fee of approximately $600-900 (depending on province), and appraisal fee of approximately $350. This is in addition to the discharge fee from the lender you are switching from (anywhere from $0 to $400, depending on your province (usually $300 to $400 in Ontario). The discharge fee generally applies regardless of whether you’re switching from a collateral or standard charge mortgage.

There are now some lenders who will cover some, or even all of these costs for you, so a collateral mortgage is not as big of a deal as it used to be. You can read more about this in my blog on Everything You Need To Know About Collateral Mortgages

 

Conclusion

Whether you’re looking to add a HELOC at the time you purchase your home or looking at adding one in the middle of your term, there are different ways in which it can be structured. They type of set up can have a big effect on the overall cost of the mortgage, as well as your maximum qualified amount. Everyone’s situation is a bit different, and there is no one size fits all mortgage advice. It can get confusing, but we’ll make this as easy as possible for you. Reach out to us and a member of my team can advise you on the best options for your specific situation.