A home equity line of credit (HELOC) or a home equity loan is a great way to borrow against the equity of your home. With housing prices at record levels in the Greater Toronto Area (GTA) and interest rates near record lows, it’s a perfect time for property owners to consider taking out a HELOC or home equity loan .
Is A Home Equity Line of Credit Right for Me?
If you own a home and have been paying down your mortgage, you’ve been building up equity in your property. Your home equity is the difference between the market value of your home and any debts—like the outstanding mortgage—registered against it.
If your home has increased in value, you could have a lot more equity than you expect. Many home owners tap the equity they’ve built up over the years to pay down debt, renovate, or invest in additional real estate.
Two of the most popular ways to access the equity built up in your property is through a HELOC or a home equity loan. While they sound similar—both use your current property as collateral—they operate quite differently.
A HELOC is a revolving account that lets you borrow against your home equity. Because it’s revolving, you can withdraw money as needed, and you only pay interest on the amount you borrow.
A home equity loan , on the other hand, operates like your primary mortgage. You receive a fixed amount of money—payable over a fixed period of time, typically—with a fixed interest rate. Once you receive the home equity loan, you start to pay interest on the entire amount. On top of that, you cannot get more from the loan.
Best of all, in many cases, with a home equity loan product, the interest rate is lower compared to other types of open loans. That’s because your home is used as collateral. The interest charged on home equity loans is calculated at a variable rate plus prime. Because the rate is variable it can vary drastically depending on which financial institution you use. That said, some lending institutions also offer a fixed-rate option.
How Much Home Equity Can I Borrow?
Depending on the market value of your home, the outstanding mortgage balance, and certain other factors (a steady income, good credit score, marketable property, etc.), you may qualify for a HELOC or home equity loan .
A HELOC allows you to access a maximum of 65% of the value of your home. At the same time, the HELOC and home balance cannot equal more than 80% of the home’s appraised value.
For example, you want a HELOC to purchase an additional property in Toronto—how much do you qualify for? First, take your home’s current value and multiply it by 80%. Then subtract the balance of your mortgage. That figure is how much you can access through a HELOC, as long as it is not worth more than 65% of your home’s value. To figure that out, simply divide the HELOC amount by your home’s appraised value.
If your home is currently appraised for $500,000 and you still have $100,000 left to pay off on your mortgage, your maximum loan-to-value ratio at 80% is $400,000. Subtract the $100,000 left on your mortgage and you can access $300,000 with a HELOC.
On the other hand, a home equity loan—often called a second mortgage—operates the same way as your primary mortgage. It’s used for a specific amount and is repaid with fixed monthly payments.
Canadalend.com—Toronto’s HELOC and Home Equity Loan Professionals
Because you’re using your property as collateral, it’s not too difficult to find a lender willing to give you a HELOC or home equity loan. But, the rates and conditions of the financial product may vary depending on the lender.
That’s why it’s important to talk to the licensed, independent agents at Canadalend.com first. Because we’re independent, we have access to hundreds of lenders. We’ll evaluate your financial situation, help you decide which kind of loan is best for your financial and lifestyle needs, and find you the right lender.
If you’re thinking of buying an investment property in the Toronto area and want to see how much equity you can access, contact us today. Or, you can apply o nline and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.