You may have heard of a Toronto home equity loan referred to as a HELOC when looking into taking out a line of credit against your home. There are a few things that you need to know about a HELOC before taking one out, and as a Toronto Mortgage Broker, this is something I can help you with.
What is a Home Equity Line of Credit?
A home equity line of credit is a secured, revolving form of credit. It lets you use the equity in your home to borrow against. For lenders, a HELOC is a guarantee that the money borrowed will be paid back. You have a maximum credit amount that you can use to borrow against and once you pay it back, you can borrow it again. HELOC’s come in two forms of equity lines of credit.
HELOC with a Mortgage
You will find that most of the major financial institutions have their own branded form of a home equity line of credit that can be combined with a mortgage.
The way this type of home equity line of credit works is combining a fixed term mortgage with a line of credit that is revolving. Your lender will give you an amortization schedule and you are required to make regular payments towards the interest and principal.
With this home equity line of credit option, the limit of the allowable credit maximum is 65% of the home’s market value or purchase price. As the mortgage balance goes down, the equity in your home rises, which allows you to gain a higher credit amount. You can buy a home and finance part of the purchase using this form of Toronto home equity loan, and part using the mortgage.
HELOC as a Stand-Alone Credit Line
With this option, you are just taking out the revolving credit line against your home equity, without the addition of a mortgage. The maximum amount of credit that you can take out with a stand-alone credit line is no more than 65% of the home’s purchase price or market value. The credit line doesn’t increase as you pay the mortgage principal down though.
In some cases, stand-alone HELOC can be used as a substitute for taking out a mortgage, meaning you are able to use it to buy a home rather than taking a mortgage out. What this means is:
- You won’t be required to pay the interest and principal off on a payment schedule that is fixed.
- You will need at least 35% of the home’s purchase price as a down payment.
- You get more flexibility because you are able to choose the amount you repay towards the principal at any given time.
- You are able to pay the entire balance off without incurring any prepayment penalties.
How Is This Different from a Home Equity Loan?
With a traditional home equity loan, you receive a lump sum payment that can be up to 80% of the home’s value. You also pay interest on the entire amount of the loan. This is also not a revolving line of credit, and you will need to make fixed repayment amounts on a schedule that has a fixed term. The payments that you make go towards both the principal and interest.
How to Qualify for a HELOC
With a home equity line of credit, you need only be approved once and then you have access to it whenever you need it. What you will need to qualify:
- A minimum of 20% equity or down payment (for a HELOC with a mortgage)
- A minimum of 35% equity or down payment (for a stand-alone HELOC)
- Some form of credit to use as a substitute for a mortgage
- An acceptable credit rating
- Proof of your income and it’s stability
- An acceptable debt-to-income ratio
- Must pass the “stress test”
If you want to know more about a Toronto home equity loan, contact me or give me a call today!