Choosing Between Mortgage and HELOC? Read This Article
The booming demand for home renovation projects has resulted in tremendous growth of mortgage lines of credit, aka HELOC, in Canada.
26/08/2021
HELOC stands for a mortgage line of credit that lets you take advantage of the equity value in your property. It works like a credit card, giving you a revolving credit that you can utilize for home reno projects. You can consider applying for a HELOC if you need a large amount of money for costly purchases, investing in a new property, paying for education, or consolidating your debt.
On the other hand, a mortgage is a standard loan mechanism where you borrow a fixed sum against your home. This is generally resorted to for the purpose of purchasing a new property. In many cases, the house being purchased is itself mortgaged as security.
If you are looking for more information about mortgage HELOC financial arrangements, click here to learn more.
Who Can Apply For A HELOC In Canada?
The basic rules and requirements to qualify for
a HELOC in Canada are following:
● The
borrower must be a Canadian resident and more
than 18 years of age.
● The borrower needs
to hold a minimum of 20% equity in their homes.
● Typically, a borrower can borrow up to 65% of
the property's value using a HELOC.
● The
aggregate of the outstanding mortgage balance
and HELOC must not go over 80 percent of the
home's value.
● The mortgaged property has to
be in Canada.
If you are looking for a HELOC, here are some more features you should be aware of.
● A HELOC comes with a
variable interest rate.
● The interest you
pay is calculated on the amount you borrow.
●
The "draw period" of a HELOC typically spans ten
years, during which you can access the fund.
● After the "draw period," the repayment period
starts.
● The lenders consider the income
stability and loan payback ability of the
borrowers.
● Depending on how you manage your
HELOC, it can affect your credit score.
●
The credit history of the borrower plays a role
in HELOC approval.
● A good credit score
determines the borrower's creditworthiness and
helps get a better deal with favorable terms.
● On-time payment keeps your credit score
shining, and late payments will hurt it.
What Is Right For You? HELOC or Mortgage?
Homeowners often feel confused between a HELOC and a mortgage. Before looking at the pros and cons of HELOCs, we also find out how it differs from the mortgage loans. Many homeowners prefer mortgage loans when in need of a lump sum. Unlike a HELOC, which is getting more challenging to qualify for, a mortgage loan is easier to qualify for. Interest rates for mortgage loans are lower than personal loans and credit cards.
Another advantage is you can use them for other purposes, including funding for education or other emergencies. The best thing about mortgage loans is the fixed rate of interest. Unlike a HELOC, the interest of mortgage loans doesn't change, so the borrowers know how much to pay. You can also refinance your mortgage loan and reduce your monthly payment and use the balance for home renovations.
Advantages and Disadvantages of a HELOC
Like all financial products, HELOCs, too, have pros and cons. The advantages include:
Easy Accessibility
A HELOC works like a credit card. You borrow the amount within your spending limit whenever you have a need. A HELOC circle works this way - borrow, repay, and repeat.
Access to Large Amount
If you need a lump sum, a HELOC may help you with it, provided you qualify the criteria set by the lenders.
Flexibility
The best thing about a HELOC is its flexibility. You pay interest for what you have borrowed. Reasonable repayment terms make HELOCs a favorite with the borrowers.
Tax benefits
If you want to invest money and secure a loan through HELOC, the loan interest becomes tax-deductible. Similarly, you get the same advantage if you purchase an investment property and use a HELOC loan for the down payment.
Disadvantages of HELOCs
HELOCs work like credit cards, but if you default, you may lose your home. Here we discuss some risks of HELOCs:
Fees
You may have to pay different types of fees that can add up. While shopping for a FELOC, it is wise to understand how much you have to pay for upfront and closing costs. Also, count the annual fees the lenders charge.
Variable Interest Rates
Because the banks can raise the interest
rates at any time, HELOCs come with
unpredictable interest rates. It means with a
HELOC, your monthly payment may fluctuate and
may not be affordable. Furthermore, HELOCs are
call-able, and banks can change your borrowing
terms.
Mortgage loans can give you a
fixed rate where you may end up paying slightly
higher than a HELOC loan. If you stick to a
HELOC, ask your lender the duration of the
initial HELOC loan.
Amortization
As a non-amortized financial product, HELOC debts tend to stay. It makes sense if you mark when the draw period ends and the repayment period starts.
Risk of Overspending
According to a report, many Canadians use HELOCs to splurge on life's finer things. Many use HELOCs for paying for a lavish vacation or buying an expensive car. Easy cash at a lower price is a temptation but has potential risks.
Foreclosure Risk
If your income is unstable and your finance is not good, a HELOC may cost you your home.
Endnote
If you handle your HELOC responsibly, you may find it better than a mortgage. If you use your HELOC loan for home renovations or upgrading the property, you are taking a step to increase the value of a property which is a smart move. However, using debts to upgrade your lifestyle may put you at risk. Always consider resorting to professional advice before making a major financial or investment decision.