As businesses and other organization digitization is on the rise, Canadian banks are expected to tighten access to home equity lines of credit (HELOC). Different government assistance programs end in a few months and mortgage lenders seek to limit lines of credit to property buyers looking for a new home.
Home equity lines of credit (HELOC), allow property buyers to borrow back any equity in their property, have seen limitations since the outbreak of Covid-19. Since the situation has put a halt to economic activity, many properties buyers used the current federal government measures and bank loan deferrals to get by. But as lockdown eases and businesses start to get back on their feet, there is much positivity. In many cases, property borrowers will likely try to tap home equity lines of credit, particularly if unemployment remains elevated.
The good news for Canadians is that you can tap into your home equity by taking a home equity loan or opening up a home equity line of credit (HELOC). The bad news is, you'll pay interest on the loan and there is also the possible calculated risk associated with taking equity in your home. If you have a pressing financial need, it could make sense to accept those risks but be sure you know exactly what you're getting into.
These three facts will help you make the right decision about whether a home equity loan or HELOC is right for you.
You should have sufficient equity in your house to protect both you and the credit union from whom you borrowed. If your home is worth $300,000 and you borrow $300,000, it will be difficult to sell the house for a price high enough to pay off the loan, especially if property values fall. If the bank has to foreclose, the selling part might not generate enough to repay all costs. This is true when you first consider a mortgage and when you opt for a home equity loan.
Whether you go with the decision of home equity loan or a home equity line of credit, the credit union or bank may help you to determine your combined the loan-to-value ratio by adding the amount to the first loan and offer a new loan based on dividing the total by the value of your home. It is true that most credit unions won't issue a home equity loan unless your combined loan-to-value ratio totals 80% or less, although some credit unions may still go ahead!
If you want to borrow against the equity in your home, you could structure your borrowing in two ways.
One option is a home equity loan. This works in a similar way to a traditional mortgage. Borrow a fixed amount of cash, usually at a fixed rate, to repay over a fixed length of time, usually 5-15 years.
Alternatively, a HELOC allows you to borrow up to a certain amount of money, say $20,000, at a variable rate over an unlimited period of time. However, you don't have to draw down all the cash at once. The HELOC works in a similar way to a credit card, but at a low-interest rate because your house serves as collateral. You can borrow as needed, up to the maximum, and pay back what you've borrowed over time.
HELOCs usually have variable rates, and you may have to pay an off-page payment at the end of the loan if you are left with a pending amount. If you have a $20,000 line of credit and borrowed a total of $16,000, you'd have to pay the full $16,000 when the expected line of credit has expired. Some mortgage lenders allow you to renew a HELOC, and some do not. You benefit from the flexibility of not having to borrow the cash at once but take the risk that interest rates may rise, or that you'll be stuck with a big payment at the end of the term.
One significant benefit of the home equity loan and home equity line of credit is the tax deductibility with the interest rate change. You can deduct the interest on a loan, up to $200,000 if you're married and are filing taxes jointly, or $100,000 if you're single or married but filing taxes separately.
Deducting your loan interest could save thousands of dollars, but it’s important to itemize your deductions in order to claim the tax break.
Currently, only around 30% of households itemize their deductions. The before-tax time comes around, figure out whether itemizing or taking the standard deduction will save you money.
There’s no “best choice"; it comes down to finding the best option to suit your circumstances. A home equity loan can be a great way of getting the peace of mind, with the balance of home buying options in Canada. But if you’re over 55 years old and don’t have a steady income, a reverse mortgage might work better for you. It's always better to stay up-to-date if you are looking for a home equity loan in a location like Ontario to ensure you don't end up purchasing something else!