HELOC stands for Home Equity Line of Credit.
It is a revolving line of credit that allows you to borrow the equity in your home at a much lower interest rate than a traditional (unsecured) line of credit. A HELOC is flexible and can have various components, including amortizing mortgage components and revolving lines of credit. You can use HELOC funds at your discretion for renovations, tax efficient investing, debt consolidation, higher education or anything else you need.
The HELOC is secured by your home and cannot exceed 65% of your home's value.
You have the freedom to use as much or as little of the HELOC as you choose, and you only pay interest on the amount you have withdrawn. Interest is calculated daily at a variable rate attached to Prime, however, HELOC rates are often higher than variable mortgage rates and the relationship to Prime can technically change anytime at the disrection of your lender. For example, a variable mortgage rate is often Prime MINUS a number, like Prime – 0.45%. HELOC rates, however, are set at Prime PLUS a number and your lender can technically change that number anytime.
Bob and Joanne's current mortgage is coming up for renewal and they are exploring options. They have equity in their home and are interested in tax reduction strategies.
Their current mortgage balance is $200,000.
Their home appraises at $500,000.
Based on 65% of the appraised property value; we set up HELOC for $325,000 structured as follows:
$200,000 as an amortizing mortgage component at a 5-year fixed rate of 2.64%, 20-year amortization = $1,072/month payment
$125,000 is available as a line of credit. They withdraw $100,000 for investments. Their line of credit rate is Prime +.50 (3.20%) and the minimum monthly payment is an Interest-Only payment of $265.
Their Financial Advisor considers various investment vehicles including maximizing their RRSPs. As a result, Bob and Joanne have a flexible, readvancement mortgage product; enjoy a higher rate of return on their investments, PLUS receive a nice TAX REFUND.
The remaining $25,000 of their HELOC will be an emergency or rainy day fund, and because Bob and Joanne haven't drawn out any funds, there is $0 monthly payment.
As Bob and Joanne pay down their mortgage portion, more room opens up as a line of credit.
There are several different HELOC products available in Canada through various lending institutions including; BMO Homeowner ReadiLine, Scotia STEP, National Bank All-In-One, and the very popular Manulife One.
Call me to further discuss your options today!