Understanding Home Equity Line of Credit

Mudit Buying

A secured line of credit is essentially a low-interest loan that a financial institution offers you against your investments as collateral, generally your own Real Estate property or Guaranteed Investment certificates, etc.

Since your owned asset backs the line of credit, it has a relatively lower interest rate and higher credit limit. The lender has a safety net that they can acquire and freeze the asset if the borrower does not pay the debt on agreed terms. They can go for power of sale of the property to recover their funds.

The terms are generally better on Secured lines of Credit than unsecured ones by much lower interest rates, and the payments can be interest-only payments.

This readvancing or refinancing of funds backed by Real Estate or GIC type of security is also called the Equity Line of Credit or HELOC (Home Equity Line of Credit). The lenders would assess how much can be provided to you as a Secured Line of Credit by evaluation of the following:

1) Your credit-worthiness – This is primary for a lender to see if your credit rating is not fractured, and you indeed have good loan re-payment history.
2) Your Equity – How much of your own equity you have in the asset you are trying to utilize as collateral in getting the Secured Line of Credit. You should have at least 20% equity in your home.
3) Source of Income – This is another essential factor to know whether you would be able to survive the interest payments if you decide to utilize the funds in a secured line of Credit by considering your existing liabilities like mortgage, car loans, personal loans, etc.
4) Property Appraisal – Process to ascertain the market valuation of the property which is backed as the security for the Line of Credit

The above factors would determine how large or small HELOC a financial institution will offer you.

Benefits of Secured Line of Credit
1) Flexible Access to funds – You can utilize the amount of approved funds as and when you require it; it is immediately accessible, and interest only applies to the portion used by you.
2) Interest-only payments
3 You can pay back any utilized amount at any time without any penalty at your schedule
4) It is a revolving credit; when you pay back the borrowed funds, the amount of remaining credit increases to the maximum amount of line approved.

Payment could be only on the interest on the amount you borrowed as a minimum monthly payment. You can pay back the principal amount borrowed in one shot or part payments as you can.

HELOC’s are generally utilized for debt consolidations, making larger purchases and home renovations due to their lower costs in terms of moderate interest rates and re-payment terms.

How much HELOC I can get?

The home equity line of credit funds cannot exceed 65% of the home’s value in order to safeguard the lender. Also, your mortgage loan balance plus your approved line of Credit cannot be more than 80% of home value.

Let’s understand this with an example. Let us assume the market valuation of a home is $400,000, and your outstanding loan balance is $270,000.

65% of the Market Value $260,000.

Maximum loan-to-value based on 80% = $320,000
Outstanding Balance on the Current Mortgage = $270,000
Allowable HELOC Amount = Maximum LTV Amount – Outstanding Balance = $50,000

To ensure how much HELOC Amount is to value, it is 12.5% in our case; which is less than 65% of the market value of the line. Here in our example, 65% of Market Value is $260,000, so our HELOC cannot exceed this value, and in our case, it is $50,000, which is well within.

To ensure how much HELOC Amount is to value: 12.5%, which is less than 65% of the market value of the line. Here in our example, 65% of Market Value is $260,000, so our HELOC cannot exceed this value, and in our case, it is $50,000, which is well within.

Another important thing here you should remember that for HELOC, various banks have different minimum amount requirements, which you can take as a secured line. The maximum loan amount theoretically can be 65% of the market value.

Hope you found it helpful, please refer to our other blogs for assisting in Real Estate Buying and Selling.

Reach out to our team if you are in the Greater Toronto Area for skilled assistance to meet your Real Estate goals.