*This post was created in collaboration with Alpine Credits
Did you know you can access money from your home equity through a HELOC? Depending on how much equity you have accrued, you can tap into it and use the funds to cover a variety of expenses. But before using your home equity, there are many mortgage HELOC rules to consider first.
Key Points
- HELOCs can be a convenient way to have immediate access to extra cash without the need to apply for individual loans whenever the need for borrowed funds arises.
- There are rules to follow when it comes to HELOCs, including minimum equity requirements, maximum borrowing capacity, and financial/credit requirements.
- Generally speaking, you’ll need at least 20% equity in your home and can borrow up to 65% of your equity.
- There may be fees to pay when you take out a HELOC, similar to what you would pay when you take out a typical mortgage.
Mortgage HELOC Rules On Qualification Requirements
The requirements to qualify for a HELOC will vary by lender. In order to get approved and access funds from your HELOC whenever you need, you need to meet certain requirements. Here are some mortgage HELOC rules on qualifying:
Minimum Equity Requirements
Most lenders will require you to have a minimum equity of 20%. This refers to the difference between your home’s current value and the amount of mortgage you have left to pay. Lenders will use this value to calculate your loan-to-value (LTV) ratio, which is the loan amount relative to the value of the home.
Credit Score Requirements
Like other loan types, you may also need a decent credit score, usually a minimum of 650 to 680. Generally, the higher the score, the more likely you’ll qualify for lower rates.
Financial Health Requirements
Similarly, you’ll need sufficient income to support your payments. This includes having a manageable debt load that does not take up much of your current income. Lenders usually have a debt-to-income (DTI) threshold of 44%.
Stress Test Requirements
If you’re applying for a HELOC with a federally-regulated bank, you may be subject to a mortgage stress test. It will test whether you would be able to continue making payments in the event that interest rates rise. Right now, this means you will have to use the higher of these two options to qualify:
- Bank of Canada’s five-year interest rate
- The interest rate your lender offers you, plus 2%.
Can’t Pass The Stress Test? Here’s An Alternative
If you don’t have the income or credit score to pass the stress test, don’t worry. There are many other lenders such as Alpine Credits, who allow you to tap into your home equity regardless of your credit history and income. Whether you’d like to consolidate debt or cover a home renovation, you can get the funds you need quickly without the need to undergo a mortgage stress test.
What Is A HELOC?
A HELOC is a revolving credit line that you can access whenever you need extra cash. You can draw as little or as much as you like, up to the credit limit.
With a HELOC, your home is used as collateral in case you’re unable to repay any withdrawn funds. Like credit cards, you’re only charged interest on the amount of money you withdraw.
How Does A HELOC Work?
With a HELOC, you’ll need at least 20% equity in your home, as mentioned. If approved, you can borrow up to 65% of your home’s appraised value, less any outstanding mortgage. You can then use the money to cover any expenses you have.
To use your equity through a HELOC, you’ll be given access to a credit line. You can withdraw from this account up to a maximum credit limit, much like a credit card.
Stand-Alone HELOC
A stand-alone HELOC is a revolving credit line backed by your home, but not related to your mortgage. The maximum credit limit on a stand-alone HELOC is 65% of your home’s market value. As you pay down the principal, the credit limit will not increase, unlike a HELOC combined with a mortgage.
HELOC Combined With A Mortgage
You can also apply for a HELOC combined with a fixed-rate mortgage. With this arrangement, you can borrow up to 65% of your home’s value. As you pay down the principal, the credit limit will increase accordingly.
You won’t have to make fixed payments on this type of HELOC. Instead, you’ll only have to pay interest on what you withdraw. Keep in mind that you’ll still need to make regular payments on your mortgage.
Buying A House With A HELOC Combined With A Mortgage
Up to 80% of a home purchase can be financed with a combination of a HELOC and fixed-term mortgage. The portion of your home that can be financed with a HELOC cannot exceed 65% of its purchase price. If you want to finance your home up to 80% of its purchase price, the remainder over 65% has to be on a fixed-term mortgage.
Using A HELOC As A Substitute For A Mortgage
You can use a stand-alone HELOC as a substitute for a traditional mortgage to buy a home. You may choose this route if you want some flexibility with repayments.
More specifically, using a stand-alone HELOC as a substitute for a mortgage does not require you to pay down the principal and interest through fixed repayments. Instead, you can decide how much principal you want to pay down at any time. If you have the financial means, you can pay off the full loan balance at any time without being subject to an early prepayment penalty fee.
Do note that you will need a higher down payment amount or more equity in the home to qualify for this option. In particular, a down payment of at least 35% of the purchase price or market value is required.
How To Apply For A HELOC
To apply for a home equity line of credit, follow these steps:
Step 1. Find Out How Much Equity You Have
To apply for a HELOC, you’ll first want to ensure you have enough equity in your home to get approved. To determine how much equity you have, subtract your outstanding mortgage balance from your home’s current market value.
For instance, if your home is currently worth $650,000 and you have $400,000 remaining on your mortgage, then you have $250,000 in equity:
$650,000 (home value) – $400,000 (mortgage balance) = $250,000
To determine the percentage equity you have in your home, divide the equity by the property value. In this case, the calculations would be as follows:
$250,000 (home equity) ÷ $650,000 (home value) x 100 = 38.5%
In this example, you would have 38.5% equity in your home, which meets the criteria for minimum equity for a HELOC.
Step 2. Check Your Credit Score
Traditional lenders may require good credit of at least 660 for a HELOC. You may also need good credit to qualify for lower rates. However, some lenders accept bad credit. You can check your credit score for free in Canada through numerous online tools and resources, including CompareHub.
If you find out you have bad credit, you may want to take steps to improve it first before applying for a HELOC.
Step 3. Gather Your Documents
Gather all documentation that your lender will likely want to see and assess before you apply for a HELOC to ensure a more seamless process. Common documents that you may need include:
- Income-related statements like pay stubs, tax receipts and bank statements
- Proof of homeownership
- Mortgage documents that show your mortgage balance, term, and amortization period
Step 4. Apply For The Loan
Most lenders have an online application system. You can generally apply and upload all the required documents online.
Step 5. Get Funded
If approved, you should gain access to your line of credit soon after, depending on the lender. For instance, with Alpine Credits, your application can be approved within 24 hours and your account can be funded within a week.
Mortgage HELOC Rules: How Much Money Can You Borrow?
You can borrow up to 65% of your home’s market value on a HELOC. The exact amount of money you can borrow through a HELOC will depend on how much equity you have in your home.
Using the above example, if you have $250,000 in equity you can borrow up to $162,500 ($250,000 x 0.65).
Mortgage HELOC Rules On Fees
It’s important to understand the fees that come with a HELOC and how they might affect the overall cost. Here are the most common fees associated with a HELOC in Canada.
- Closing Costs – Similar to a mortgage, you’ll have closing costs when you take on a HELOC. These can range from 1.5% to 4% of the total loan amount.
- Administrative Fees – This is the cost of setting up your HELOC and covers the time it took to do the paper as well as other similar administrative duties. Typically, this fee will range from $100 to $200.
- Appraisal Fees – Since a HELOC is based on your equity, your lender will need to know the exact value of your house to calculate your equity. You’ll need to pay for an appraisal of your house to determine its real value, which can cost anywhere from $250 to $500.
- Discharge Fee – Once you’ve paid off your HELOC in full, you will likely need to pay a discharge fee, which can cost anywhere from $200 to $350.
- Legal Fees – To have your loan documents registered, you will need to employ a lawyer. Most banks will have an in-house lawyer you can use. Employing a lawyer, even for a couple of hours, is expensive so expect to pay up to $1,500.
Final Thoughts On Understanding Your Mortgage HELOC Rules
A HELOC can be a convenient way to access funds without repeatedly applying for loans when the need for extra cash comes up. You can withdraw as much or as little as you want and only pay interest on what you use. That said, be sure to use the money wisely, as you are still obligated to pay whatever you withdraw back, plus interest. If you’re interested in being matched with a lender who offers home equity products, Loans Canada can help.
Mortgage HELOC Rules FAQs
Do HELOCs have transaction fees?
How much does a home appraisal cost in Canada?
What can you use a HELOC for?
Do lenders charge a loan origination fee for HELOCs?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
