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Did you know you can access hundreds of thousands of dollars through your home equity? However, the amount you qualify for varies on your home value, equity in your home and your overall finances. Moreover, there are many mortgage HELOC rules to consider before tapping into your home equity.

Also referred to as a home equity line of credit, a HELOC can help you pay for large expenses. Let’s take a look a deeper look at the rules surrounding HELOCs.

Mortgage HELOC Rules On Qualification Requirements

Whether you’re applying for a personal loan, car loan or a HELOC, the requirements to qualify 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 Requirments

Most lenders will require you to have a minimum equity of 20%. This refers to the amount of mortgage you have left versus your home’s value.  Lenders will use this value to calculate your LTV. For example, let’s say you have a house worth $500,000 and an outstanding mortgage balance of $350,000. This would mean you have an LTV of 0.70 or 70% and 30% equity in your home.

Financial Health Requirements

Like other loan types, you may also need a decent credit score (usually anywhere between 650 to 680) to qualify. Generally, the higher the score the more likely you’ll qualify for lower rates. 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 DTI threshold of 45%. 

Do note,  your lender will want to see proof of all of these factors before approving you for a HELOC. 

Stress Test Requirements

If you are applying for a HELOC with a federally-regulated bank, you may be subject to a mortgage stress test. It will test whether or not you would be able to continue 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 like 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. 

What Is A HELOC?

HELOCs are revolving credit lines whereby your home is used as collateral in case you are unable to repay any withdrawn funds. You can withdraw as little or as much as you want from your HELOC account. It can be accessed anytime the need for additional money arises, as long as you do not exceed your limit.

 Like credit cards, you are only charged interest on the amount of money you withdraw.  

How Does A HELOC Work?

When you’re approved for a HELOC, you may be given a HELOC account card or cheques that can be used with your HELOC line. HELOCs come with different terms and time frames during which you are allowed to have access to funds from your home’s equity. Some HELOCs may allow you to use the credit line for years without the need to repay the principal, while others may require the principal to be repaid much sooner. 

For instance, you may be given access to withdraw funds as often as you need over a 10-year draw period, which means you have 10 years to use funds from your HELOC without having to repay the principal. Instead, you would pay the interest on the balance. Once that 10-year period expires, you will have to pay the principal amount back over a certain period of time, along with any interest accrued. 

You may apply for a new HELOC in order to keep your credit line open and avoid repaying the full amount after a certain time frame. 

How To Apply For A HELOC

When applying for a home equity line of credit, there are a few steps you’ll need to take. 

  1. Find Out How Much Equity You Have – To apply for a HELOC, you’ll first want to make sure you have enough equity in your home to get approved. 
  2. Check Your Credit Score – While some lenders accept bad credit, a good credit score can help you qualify for even lower rates. You can check your credit score for free in Canada through numerous parties, including Compare Hub. If you find out you have bad credit, you may want to take steps to improve it first before applying for a HELOC.
  3. Gather Your Documents – Gather all the pertinent documentation that your lender will likely want to see and assess before you apply in order to ensure a more seamless process. Common documents that you may need include:
    1. Income-related statements like pay stubs, tax receipts and bank statements
    2. Documentation that proves you own your home
    3. Mortgage documents that show your mortgage balance, term and amortization period.
  4. Apply For The Loan – Most lenders have an online application system. You can generally fill out the application and provide all the required documents online. 
  5. Get Funded – If approved, you should gain access to your line of credit soon after. 
Alpine Credits

Mortgage HELOC Rules: How Much Money Can You Borrow?

The amount of money that you can borrow through a HELOC will depend on how much equity you have in your home. Your equity is what you actually own in your home after your current outstanding loan is deducted from your home’s value. For instance, if your home is worth $600,000 and you still owe $200,000 on your mortgage, you have $400,000 in equity or 67% equity. 

In Canada, your combined LTV can be up to 80% to 90%. This means, your HELOC and mortgage cannot make up more than 80% to 90% of your home’s value. Considering this, you could borrow up to $540,000 based on the example above. However, since you still owe $200,000, you could borrow the remaining $340,000 in equity.

Mortgage HELOC Rules On Fees 

A HELOC can be a great financing option for Canadian consumers who own a house and who are looking for additional cash to cover a large expense or to consolidate debt. But as with any financial product, there are fees that must be considered. 

It’s important to understand what these fees are and how they might affect the overall cost of your HELCO. Here are the most common fees associated with a HELOC in Canada. 

  • Closing Costs – Similar to a mortgage, you will be responsible for the closing costs when you take on a HELOC. These can range from $200 to $350+. 
  • Administrative Fees – This is the cost of setting up your HELOC, it covers the time it took to do the paper as well as other similar administrative duties. Typically, this fee will range from $100-$200.
  • Appraisal Fees – A HELOC is based on the equity you have built up, your lender will need to know the exact value of your house in order to properly calculate your equity. You will need to pay for an appraisal of your house to determine its real value. Hiring a professional appraiser can cost anywhere from $250 to $500.
  • Discharge Fee – Once you’re done with your HELOC and have paid it off in full you will likely need to pay a discharge fee. Expect to pay a fee of anywhere between $200 and $350.
  • Legal Fees – In order 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. 

Mortgage HELOC Rules FAQs

Do HELOCs have transaction fees?

Most HELOCs come with withdrawal, balance, or transaction fees. This means you may be charged a fee every time you withdraw from your account or if you don’t maintain a certain balance. Crunch the numbers with your lender to find out exactly how much your HELOC will cost you before applying for one to make sure you’re financially capable of handling this additional debt.

How much does a home appraisal cost in Canada?

Hiring a professional appraiser can cost anywhere from $250 to $500.

What can you use a HELOC for? 

A HELOC can be used for anything that you need to financially cover at your discretion. Having said that, many homeowners take out a HELOC as a way to consolidate higher-interest rate debt, such as credit cards and payday loans, which are notorious for having sky-high interest rates. 

Do lenders charge a loan origination fee for HELOCs?

This is a one time fee that most lenders charge to process a new loan. The cost will depend on the value of your HELOC, although a good frame of reference is between 0.5% and 1% of the loan.  

Final Thoughts On Understanding Your Mortgage HELOC Rules

A HELOC can be a convenient way to access funds without having to repeatedly apply for loans when the need for extra cash comes up. You can withdraw as much or as little as you want, and you don’t have to worry about paying interest on the full credit amount like you would with a home equity mortgage. 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.

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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