Buying a home with a home equity line of credit combined with a mortgage

You can finance part of your home purchase with your HELOC, and part with the fixed term mortgage. You can decide with your lender how to use these two portions to finance your home purchase.

You need a 20% down payment or 20% equity in your home. You’ll need a higher down payment or more equity if you want to finance your home with just a HELOC. The portion of your home that you can finance with your HELOC can’t be greater than 65% of its purchase price or market value. You can finance your home up to 80% of its purchase price or market value, but the remaining amount above 65% must be on a fixed term mortgage.

For example, you purchase a home for $400,000, make an $80,000 down payment and your mortgage balance owing is $320,000. The maximum you’d be allowed to finance with your HELOC is $260,000 ($400,000 x 65%). The remaining $60,000 ($320,000 – $260,000) needs to be financed with a fixed term mortgage.

Creating sub-accounts in a home equity line of credit combined with a mortgage

A HELOC combined with a mortgage can include other forms of credit and banking products under a single credit limit, such as:

  • personal loans
  • credit cards
  • car loans
  • business loans

You may be able to set up these loans and credit products as sub-accounts within your HELOC combined with a mortgage. These different loans and credit products can have different interest rates and terms than your HELOC.

You can also use your HELOC to pay down debts you have with other lenders.

It’s important to be disciplined when using a HELOC combined with a mortgage to avoid taking on more debt than you can afford to pay back.

Stand-alone home equity line of credit

A stand-alone HELOC is a revolving credit product guaranteed by your home. It’s not related to your mortgage.

The maximum credit limit on a stand-alone HELOC:

  • can go up to 65% of your home’s purchase price or market value
  • won’t increase as you pay down mortgage principal

You can apply for a stand-alone HELOC with any lender that offers it.

Substitute for a mortgage

A stand-alone HELOC can be used as a substitute for a mortgage. You can use it instead of a mortgage to buy a home.

Buying a home with a HELOC instead of a traditional mortgage means:

  • you’re not required to pay off the principal and interest on a fixed payment schedule
  • there’s a higher minimum down payment or more equity required (at least 35% of the purchase price or market value)

Using a HELOC as a substitute for a mortgage can offer flexibility. You can choose how much principal you want to repay at any time. You can also pay off the entire balance any time without paying a prepayment penalty.

Home equity loans

A home equity loan is different from a home equity line of credit. With a home equity loan, you’re given a one-time lump sum payment. This can be up to 80% of your home’s value. You pay interest on the entire amount.

The loan isn’t revolving credit. You must repay fixed amounts on a fixed term and schedule. Your payments cover principal and interest.

Learn more about borrowing against home equity.

Qualify for a home equity line of credit

You only have to qualify and be approved for a HELOC once. After you’re approved, you can access your HELOC whenever you want.

You’ll need:

  • a minimum down payment or equity of 20%, or
  • a minimum down payment or equity of 35% if you want to use a stand-alone HELOC as a substitute for a mortgage

Before approving you for a HELOC, your lender will also require that you have:

  • an acceptable credit score
  • proof of sufficient and stable income
  • an acceptable level of debt compared to your income

To qualify for a HELOC at a bank, you will need to pass a “stress test”. You will need to prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your contract.

You need to pass this stress test even if you don’t need mortgage loan insurance.

Credit unions and other lenders that are not federally regulated may choose to use this stress test when you apply for a HELOC. They are not required to do so.

The bank must use the higher interest rate of either:

  • 5.25%
  • the interest rate you negotiate with your lender plus 2%

If you own your home and want to use the equity in your home to get a HELOC, you’ll also be required to:

  • provide proof you own your home
  • supply your mortgage details, such as the current mortgage balance, term and amortization period
  • have your lender assess your home’s value

You’ll need a lawyer (or notary in Québec) or a title service company to register your home as collateral. Ask your lender for more details.

Calculate your level of debt compared to your income.

Optional credit insurance

When you’re approved for a HELOC, your lender may offer you optional credit insurance.

Optional credit insurance is life, serious illness and disability insurance products that can help make payments, or can help pay off the remainder owing on your HELOC usually up to a maximum amount, if you:

  • lose your job
  • become injured or disabled
  • become critically ill
  • die

You don’t need to purchase optional credit insurance to be approved for a HELOC.

There are important limits on the coverage that optional credit insurance products provide. Read the terms and conditions carefully and ask questions if there’s anything you don’t understand before purchasing these products.

Before you get optional credit insurance:

  • check if you already have insurance coverage through your employer to pay off your debts in case of death or disability
  • compare the coverage offered by other insurance products, such as life and health insurance, to see which product meets your needs and offers the best value

Learn more about credit or loan insurance.

Tips before you get a home equity line of credit

  • Determine whether you need extra credit to achieve your goals or could you build and use savings instead
  • If you decide you need credit, consider things like flexibility, fees, interest rates and terms and conditions
  • Make a clear plan of how you’ll use the money you borrow
  • Create a realistic budget for your projects
  • Determine the credit limit you need
  • Shop around and negotiate with different lenders
  • Create a repayment schedule and stick to it

A HELOC may or may not be useful to you. If your lender is a federally regulated bank, they must offer and sell you products and services that are appropriate for you, based on your circumstances and financial needs. They also must tell you if they’ve assessed that a product or service isn’t appropriate for you. Take the time to describe your financial situation to ensure you get the right product. Don’t hesitate to ask questions and make sure you understand the mortgage product you have or want.

Learn more about what to consider before borrowing money.

Questions to ask lenders

  • What do they require for you to qualify
  • What’s the best interest rate they can offer you
  • How much notice will you be given before an interest rate increase
  • What fees apply

Advantages and disadvantages of a home equity line of credit

Advantages of HELOCs include:

  • easy access to available credit
  • often lower interest rates than other types of credit (especially unsecured loans and credit cards)
  • you only pay interest on the amount you borrow
  • you can pay back the money you borrow at any time without a prepayment penalty
  • you can borrow as much as you want up to your available credit limit
  • it’s flexible and can be set up to fit your borrowing needs
  • you can consolidate your debts, often at a lower interest rate

Disadvantages of HELOCs include:

  • it requires discipline to pay it off because you’re usually only required to pay monthly interest
  • large amounts of available credit can make it easier to spend higher amounts and carry debt for a long time
  • to switch your mortgage to another lender you may have to pay off your full HELOC and any credit products you have with it
  • your lender can take possession of your home if you miss payments even after working with your lender on a repayment plan

These are some disadvantages of a HELOC that are common to other loans:

  • variable interest rates can change which could increase your monthly interest payments (your lender will provide advance notice of any change)
  • your lender can reduce your credit limit at any time (your lender will provide advance notice of any change)
  • your lender has the right to demand that you pay the full amount at any time
  • your credit score will decrease if you don’t make the minimum payments as required by your lender

Understand your home equity line of credit contract

Shop around with different lenders to find a HELOC that suits your needs.

Each HELOC contract may have different terms and conditions. Review these carefully. Ask your lender about anything you don’t understand.

Interest rates

Home equity lines of credit can have different interest rates depending on how they’re set up.

They usually have a variable interest rate based on a lender’s prime interest rate. The lender’s prime interest rate is set by a financial institution as a starting rate for their variable loans, such as mortgages and lines of credit.

For example, a HELOC can have an interest rate of prime plus one percent. If the lender’s prime interest rate is 2.85%, then your HELOC would have an interest rate of 3.85% (2.85% + 1%).

You can try to negotiate interest rates with your lender. Lenders will consider:

  • your credit score
  • income stability
  • net worth
  • your home’s price
  • any existing relationship you may have with them

Tell them about any offers you’ve received from other lenders.

Your lender can change these rates at any time. Your lender must give you notice if there’s a change. Any change in the prime lending rate will affect your HELOC’s interest rate and your payment amounts.

Make sure you only borrow money that you can pay back. This will help you manage a potential increase in interest rates.

Learn about protecting yourself against rising interest rates.

Fees

Fees may vary between home equity lines of credit.

Some common fees include:

  • home appraisal or valuation fees: Your lender charges this fee to send someone to assess your home’s value
  • legal fees: Your lawyer (or notary in Québec) or title service company charges this fee to register the collateral charge on your home
  • title search fees: This is another legal fee to ensure there are no liens on your home
  • administration fees: Your lender charges this fee for setting up and maintaining your account
  • credit insurance fees: also known as premiums for optional life, critical illness, disability and job loss insurance
  • discharge or cancellation fees: Your lender or your notary (in Québec) charges this fee if you cancel your HELOC and remove the collateral charge from the title of your home

Ask your lender about all the fees involved with your HELOC.

Make a plan to use your home equity line of credit