*This post was created in collaboration with Alpine Credits
While the average car loan interest rates have started to fall slightly, they’re still high compared to pre-covid times. Thankfully, a car loan is not the only way to finance a vehicle purchase. There are other savvy ways to help cover the cost of buying a car. One way to get your hands on the necessary funds is to take out a home equity line of credit (HELOC). This unique type of financing may be an option if you’re a homeowner with a certain amount of equity built up.
Let’s look further into using a HELOC to buy a car and see if it’s a good option for you over a traditional auto loan.
Can You Use A HELOC To Buy A Car In Canada?
Yes, you can cover the cost of a vehicle purchase using a HELOC. While it’s more common to use an auto loan to buy a car, a HELOC is still an option if you’re a homeowner with equity in your home.
In fact, you may find that a HELOC fits in better with your budget and is more manageable than a car loan. That’s because you may be able to secure lower rates and longer terms compared to a traditional car loan. With a longer loan term, you’ll have more time to repay the loan with smaller installment payments.
| How Much Can You Borrow To Buy A Car With A HELOC? Generally speaking, the maximum you can borrow using a HELOC is equal to no more than 65% of your current house value minus your outstanding mortgage balance. So if you have a $700,000 home and a mortgage balance of $500,000, you’d be able to borrow up to $45,000 (65% x $700,000 – $500,000) for a car. |
Are HELOC Rates Lower Than Car Loan Interest Rates?
Generally speaking, HELOC interest rates are lower than car loan interest rates because a HELOC is collateralized by the equity in the home. That said, HELOC rates offered depend on the lender, the borrower’s credit score and income, and current market conditions as HELOC rates are variable rates which are affected by the prime rate.
In Canada, the average car loan interest rate is 7.59% as of June 2024. That said, the exact rate offered depends on several factors, including credit score, down payment, and loan term.
Car loans are made to cover the cost of a depreciating asset — the vehicle — whereas a HELOC is tied to real estate, which tends to increase in value over time. This may be another reason why car loan interest rates may be higher than HELOC rates. But again, whether the rates on a HELOC are lower than they are on car loans ultimately comes down to the specific borrower and lender.
How Long Can You Finance A Car With A HELOC?
The amount of time you have to use and repay your HELOC depends on the terms of your loan agreement. While car loan terms typically range from 3 to 7 years, HELOCs offer more flexibility in terms of repayment schedules.
With a HELOC, there is both a draw period and repayment period.
- Draw Period — During the draw period, you’ll have access to your home equity, up to a specific limit. You can borrow and repay your equity as often as you wish. This period typically lasts up to 10 years, during which time you’ll typically make interest-only payments on the balance you accrue.
- Repayment Period — Once the draw period ends, you’ll enter into the repayment period, which can last up to 20 years. During this time, you’ll make payments towards both the principal and interest.
What Will Your Payments Be Like If You Use A HELOC To Buy A Car In Canada?
One of the great things about a HELOC is that you have the option to make interest-only payments on the amount you withdraw until the draw period ends. To calculate how much interest you’ll pay on your HELOC, use the following formula:
| HELOC Balance x Interest Rate ÷ 12 months = Interest-Only Payment Amount |
For instance, let’s say you need to borrow $10,000 from your home equity to pay for a vehicle purchase at a rate of 6%. In this case, your interest-only payments would be as follows:
$10,000 x 6% ÷ 12 months = $50 per month
Note that the monthly $50 goes towards covering the interest only. No principal repayment is required until the draw period is over. That said, if you make payments of $155 each month, you’d be able to pay off your car loan in 6.5 years. This can be sped up even more by increasing your payments amounts.
What Are The Benefits Of Using A HELOC To Buy A Car?
There are several perks to using a HELOC to buy your next vehicle:
- Lower Rates — HELOCs typically offer lower interest rates compared to traditional car loans because they’re secured by your home.
- Easier To Qualify For — Because a HELOC is backed by the value of your home, this makes them less risky for lenders, making them easier to get approved for compared to other loan types. Plus, the more equity you have in your home, the better.
- Qualify For A Large Amount — Since the loan amount is based on your home’s equity with a HELOC, you may be able to borrow a higher amount than you would with an unsecured loan. Lenders typically let you borrow up to 65% of your home’s value, less any mortgage balance.
- Flexibility — A HELOC works like revolving credit, so you can borrow only what you need to cover the car’s purchase price and repay it over time.
- Own The Car Outright: A HELOC allows you to buy the car in full upfront, which means you own the vehicle outright. With a typical car loan, the lender will retain the title of the car until you pay the loan off in full. But with a HELOC, you’ll hold the vehicle’s title on your own.
What Are The Drawbacks Of Using A HELOC To Buy A Car?
Along with the upsides to using a HELOC to buy a car are some drawbacks to consider:
- Your Home Is At Risk — With a HELOC, your home collateralizes the loan. If you default on your loan payments, you risk having your home repossessed by the lender.
- Variable Interest Rates — HELOCs often come with variable interest rates, which can fluctuate over time. If they increase at some point during the loan term, you’ll pay more in interest payments.
- Mortgage Renewal May Be Affected — A HELOC can affect your mortgage renewal process in a few ways. For starters, a HELOC taps into your home equity, which reduces the amount of equity you have left. Further, a HELOC increases your total debt load, which can raise your debt-to-income ratio and may impact your ability to qualify for favourable terms when you renew.
How Using A HELOC To Buy A Car Can Affect Your Mortgage Renewal
Using a HELOC to purchase a car can affect your mortgage renewal in multiple ways, including the following:
Increased Debt-To-Income (DTI) Ratio
When your mortgage is due for renewal, your lender will review your finances again, including your debt-to-income ratio. Taking out a HELOC adds more debt to the books, which can increase your DTI ratio. This can potentially make it more difficult to qualify for good terms and rates come renewal time.
If your DTI is higher than the lender’s acceptable level (usually no more than 44%), you could be turned down for a renewal or face higher interest rates.
Increased Loan-to-Value (LTV) Ratio
A loan-to-value ratio refers to the value of your home relative to how much you have left to pay on your mortgage. When you tap into your equity in the form of a HELOC, you’ll increase your LTV ratio. If the ratio exceeds your lender’s acceptable level, you could face higher rates or may have a more difficult time renewing.
HELOC May Need To Be Repaid When Switching Lenders
If you decide to switch lenders when you renew your mortgage, you may have to repay the HELOC in full before doing so.
Bottom Line
If you own a home and have built up enough equity, then a HELOC may be worth considering to help finance a vehicle purchase rather than taking out a traditional car loan. HELOCs may come with lower rates than car loans, and you’ll have more time and flexibility to make repayments. But keep in mind that your home secures a HELOC, so your home could be at risk if you don’t repay your HELOC according to your loan agreement. If you think a HELOC is the way to go to buy a car, then Alpine Credits offers easier loan terms with no credit score or income criteria to meet. As long as you have enough equity in your home, you can qualify.
