Home Equity Line of Credit (HELOC)

What you need to know about HELOCs in Canada

There are four key things you'll need to keep in mind when considering getting a mortgage with a home equity line of credit.

1. You can access up to 65% of your home's value

In Canada, you can access up to 65% of the value of your home through a home equity line of credit. However, it's also important to remember that your outstanding mortgage loan balance + your HELOC cannot equal more than 80% of the value of your home.

To determine how much equity is at your disposal, start by taking your home’s current market value and multiplying it by 80%. Next, subtract the balance of your mortgage. The remaining figure is how much you can access through a HELOC, so long as the amount is not worth more than 65% of the value of your home. To be sure, simply divide the HELOC amount by your home's market value.

2. Your HELOC funds will be available through a revolving line of credit

With a home equity line of credit, the entire credit available is not advanced up front. Instead, you can use as much or as little of the HELOC as you choose, and you only pay interest on the amount you withdraw. Interest is calculated daily at a variable rate based on Canada’s Prime rate.

HELOC rates are traditionally higher than a variable mortgage rate but, unlike a variable mortgage rate, its relationship to Prime does not always stay the same. For example, a variable mortgage rate is often Prime +/- a number (like Prime – 0.50%). HELOC rates are set at Prime + a number, and your lender can technically change that number any time.

For example, if your HELOC rate was Prime + 0.50%, and the Prime rate is currently 7.2%, your HELOC rate would be 7.70%.

3. You make interest-only payments

If you are using any portion of your home equity line of credit, you will need to make a monthly payment for doing so. The same way a traditional line of credit works, you will only need to pay the interest on your outstanding balance and that amount is automatically taken out of your bank account on the same day each month.

To pay off the balance in full, you will need to be more disciplined and make extra payments at your own discretion. And remember: unlike a refinance, you do not need to break your existing mortgage when considering a HELOC. Therefore, you won’t need to pay a mortgage penalty – just a monthly interest-only payment.

4. Your HELOC interest rate is impacted by the Bank of Canada

HELOC rates are a type of variable-rate debt, meaning they’re influenced by the benchmark Overnight Lending Rate set by the Bank of Canada, which lenders use to set their Prime rates. Like variable-rate mortgages, your HELOC rate will change whenever the central bank hikes or cuts interest rates. This has been the case between January 2022 to July 2023, when the Bank of Canada increased its rate by a historic 10 times. As a result, the Prime rate used by lenders rose from 2.45% to 7.2% within the space of 12 months, which has directly impacted the amount of interest paid by HELOC borrowers.

5. How to calculate your HELOC

When calculating a HELOC, the two main rules of thumb are that the loan amount cannot exceed 65% of your home’s total value, and 80% of your HELOC and mortgage balance added together.

Step 1:

Let’s say a borrower has a home valued at $600,000 and has a remaining mortgage balance of $300,000.

First, we calculate the maximum loan-to-value (LTV) ratio by multiplying the home’s value by 80%:

$600,000 (home value) x 0.8 (80%) = $480,000 (maximum LTV amount)

Step 2:

Next, we calculate the maximum size the HELOC can be. To do this, we subtract the total mortgage balance from the maximum HELOC LTV amount:

$480,000 (maximum LTV amount) - $300,000 (mortgage balance) = $180,000 (maximum allowable HELOC)

Step 3:

We must also determine that the above amount doesn’t exceed 65% of the home’s total value. To determine this, we divide the HELOC amount by the home’s value:

$180,000 (maximum allowable HELOC) ÷ $600,000 (home value) = 0.3 (30%)

As a result, our borrower can access $180,000 through a HELOC, as it only equals 30% of the home's value and is within the allowable 65% maximum.

Main features of a HELOC

HELOC features can vary; it’s important for borrowers to be aware of all the different features so they can choose a HELOC product that best suits their mortgage and financial needs. Here are some of the most common features that differ from lender to lender:

• Minimum balance: Some HELOCs require borrowers to take out a minimum balance – and some lenders may not offer HELOC products at all! However, the maximum HELOC amount is always calculated as 65% of your home’s loan to value (LTV).
  
  
• The ability to convert part of your HELOC to a fixed rate: HELOC rates are variable by default, which historically are higher than fixed mortgage rate options. Some lenders may let you convert a portion of your HELOC balance to a fixed rate, which is then amortized like a mortgage in set payments.
  
  
• A HELOC in second position: Having a second position HELOC means you hold your mortgage with one lender, and can take the HELOC out at another. Not all lenders allow this, and may require you to take both products out from them.
  
  
• Sub-divide lines: This allows the borrower to split the HELOC up into smaller amounts, held in sub-accounts. For example, if you wanted to access cash to invest in the stock market; the benefit in this case is that the interest paid on borrowed money (the HELOC) is tax-deductible. Keeping that portion of the HELOC in a separate account also makes it easier to keep track of your funds.

HELOC product types

• Stand-alone home equity line of credit (HELOC): This type of HELOC is a separate loan from your mortgage; it is simply a line of credit that has been backed by your income. With these HELOCs, your credit limit is 65% of your home’s LTV. However, unlike a HELOC that’s been combined with a mortgage, the credit limit does not increase as the mortgage’s principal balance is paid down.
  
• Home equity line of credit (HELOC) combined with a mortgage: Also referred to as a readvanceable mortgage, this product is offered by most of Canada’s big banks, and combines a HELOC with a fixed-rate mortgage. With this type of HELOC, borrowers usually do not make fixed repayments, and can choose to pay interest only on a monthly basis. However, your other mortgage payments are fixed and made monthly, as per your mortgage contract. The credit limit of the HELOC is 65% of the homes value, and the amount you can borrower increases as equity is built up in the home through regular mortgage payments.

Bank prime rates

• Tangerine Prime Rate 
• TD Bank Prime Rate 
• Scotiabank Prime Rate 
• HSBC Prime Rate 
• Bank of Montreal Prime Rate 
• CIBC Prime Rate 
• RBC Royal Bank Prime Rate 

Also read: 

• Prime Rate Canada
• Overnight Lending Rate in Canada
• Fixed vs. variable mortgage rates
• Bank of Canada holds target rate at 4.5%
• How to choose between a refinance, a HELOC and a second mortgage