How to add a HELOC to your mortgage

If you’re looking to invest money in a second home, you might want to consider tapping into a Home Equity Line of Credit (HELOC) on your current mortgage. 

But, while using the equity on your home to purchase a second property might be a great investment, you can also use this line of credit to finance other things—like consolidating debt or finally redoing those 80s-style kitchen cupboards. 

What is a Home Equity Line of Credit (HELOC)? 

A home equity line of credit (HELOC) is a type of loan that allows you to borrow money using the equity in your home as collateral. It can be a useful tool for homeowners who need to borrow money for a variety of purposes, such as home renovations, debt consolidation, or emergency expenses.

If you're considering adding a HELOC to your mortgage, there are a few things you should consider. First, given that a HELOC is a type of loan, this means that you'll be borrowing money that you'll need to pay back. It’s important to have a plan in place for how you'll use the money and how you'll pay it back. It's also important to carefully consider your budget and make sure that you'll be able to afford the monthly payments on the loan.

Generally, when you get access to a HELOC, your lender will apply a draw period, which is a time frame where you’re allowed to withdraw money. This draw period often ranges anywhere from three to 10 years. Until the end of your draw period, you’ll just have to make monthly interest payments on whatever amount you pulled from the line of credit–however, by the end of the draw period you’ll have about 20 years to pay the HELOC off in full. 

Overall, in Canada, adding a HELOC to your mortgage can be a smart financial decision, as it can offer a number of benefits.

Understanding the difference between HELOCs vs. refinancing

Although you’ve probably heard the term HELOCs and home equity loans flying around, the two aren’t the same thing.

First off, it's important to understand what home equity means. Simply put, home equity is how much of your home you own vs. how much you have left on your mortgage that you need to pay back. Both HELOCs and home equity loans allow you to access your home's equity, but all work differently. 

While a HELOC is a revolving amount of credit secured against your home. You can tap into the line as needed—kind of like a credit card. You can borrow money, pay it back, and borrow again up to the maximum credit limit that the lender determines. To qualify for a HELOC, you’ll need a minimum equity of 20%. 

On the other hand, a cash-out refinance lets you convert home equity into cash. In this situation, a new mortgage is taken out for more than your previous balance, and the difference is paid to you in cash. However, if you choose to go this route, there are penalties for doing this type of refinance before the end of your mortgage term.  If this is something you’d want to consider, you might want to look into refinancing with Pine–where one of our agents will be happy to help!  

Why would you want a HELOC?

One of the main advantages of a HELOC is its flexibility. Unlike a traditional mortgage, which requires you to borrow a fixed amount of money over a set period of time, a HELOC gives you the ability to borrow money as you need it. This means that you can borrow small amounts at a time, or larger amounts depending on your needs. Plus, you also only pay interest on the money that you borrow.

Another benefit of a HELOC is its low interest rate. In Canada, HELOC rates are typically lower than credit card rates, making it a more affordable option for borrowing money. This is because the loan is secured by your home, which reduces the risk for the lender. In fact, HELOCs generally have a better interest rate than unsecured lines of credit, and you generally have access to more money. When it comes to unsecured lines of credit, the limit usually caps at $50,000. If you have good credit and a stable income, you may be able to qualify for a HELOC with a very low interest rate.

When would you consider getting a HELOC?

Getting a HELOC can help you access cash to put toward other expenses, emergency financial situations, or goals. 

1. You want to pay off your other debts 

HELOCs can be used to tap into your home's equity, so you can get access to cash. With this cash, you can look to pay off other debts you might have, such as credit card debt or a student loan. Mortgage interest rates are typically lower than credit cards, so you could pay off debt sooner by also consolidating. 

‍2. You want to invest in some home improvements and renovations

A HELOC can also be a useful financial tool for homeowners who need to borrow money for home renovations or other large expenses, which is a win-win since these renovations ultimately help increase the value of your home. However, home renovations can be extremely pricey, with the average kitchen renovation costing $30,000 in Canada. So, if you have a HELOC, you can borrow money as needed to pay for these expenses, rather than having to come up with the money all at once. This can be especially helpful if you don't have the cash on hand to pay for the renovations outright.

In addition to its flexibility and low interest rate, a HELOC can also offer tax benefits. In Canada, the interest paid on a HELOC may be tax deductible if the money is used for home renovations or other home-related expenses. This means that you could potentially save money on your taxes by using a HELOC to pay for these expenses.

‍3. You’re looking to buy a second property 

If you're buying another home, you could use your HELOC as a down payment for a second property. A 20% downpayment is required for a second mortgage. You'll also need to budget for valuation, legal, and registration fees. 

Qualifying for a HELOC in Canada 

Similar to your first home, your lender will need to look into a few things to make sure you qualify for a mortgage. Lenders will review your: 

• Equity: Before granting access to your home's equity, the lender will need to determine how much equity you have or how much of your home you've already paid for. The more of your home you own, the better your chances are that you'll qualify; however, you generally need 20% equity in your home to qualify.
• Income: Your lender will look at your income to make sure that you're able to keep up with payments on your second mortgage. Income is a large qualifying factor when it comes to a home equity loan or a HELOC, since you're taking on additional debt. 
• Credit score: Most lenders like to see a credit score of at least 660 to help you qualify for a HELOC. Having a good credit score shows that you're responsible with credit and you have a history of making payments on time. A good credit score will help you access lower interest rates.

How to apply for a HELOC in Canada 

Just as you did with your first mortgage, you can apply with a mortgage lender by submitting the proper documentation. If you think a HELOC makes sense for you, but you still have questions, a mortgage agent at Pine would be happy to help answer them.