Do You Have a Home Equity Line of Credit?

When the Prime rate went up by 0.5%, my feelings were mixed… Yes, my variable rate mortgage payments went up and I wasn’t happy about it, but on the other hand, the second component of my mortgage was locked in at a low fixed rate and that eased the pain. Wait, how could I have two mortgages in one product?

Home Equity Line of Credit (HELOC), also known as “Secured Line of Credit”, “All in One”, “STEP”, etc. is a line of credit that is registered against and secured by your home. Just like any other mortgage, the bank registers a standard charge on title of your home, in exchange for your ability to borrow money from the product, at rates significantly lower than unsecured credits offer.

Rates offered within HELOC are tied to the  Prime rate and are currently offered at Prime (3.2%) + 0.5%, i.e. 3.7%. Unsecured lines of credits offer rates that are between 8% and 10%, in rare cases lower than that.

HELOC’s can be registered behind an existing mortgage (making it a “second mortgage”), or by themselves, in first position. However, not many banks like to register a HELOC behind another product, especially if the mortgage already registered is with another lender. For a handful of banks who will register it in second position, the product can only be used as a line of credit, meaning at the rate of Prime + 0.5%, with interest only minimum payments. Very straight forward…

When registered in first position, one of the biggest advantages is that  the HELOC allows you to have multiple products inside of it. You can have regular mortgages with competitive rates, visas, and lines of credits. 

To understand how this works, let’s assume you are buying a property for $500,000 and have 20% down payment, hence need to borrow $400K.

Let’s assume that you are not sure whether to go fixed or variable. Let’s also assume that you are expecting to get a $30K bonus within a couple of months, and another $100K from inheritance a year later.

If I were you, I would split those $400K as follows: $30K in a line of credit, $100K in a one-year term mortgage and the remaining $270K split between variable and fixed term mortgages. 

This way you will have the ability to pay off $30K right after you get your bonus and $100K a year later, without having to pay any penalties. The remaining funds will be split between variable and fixed mortgages, just because you could not make up your mind whether to go fixed or variable.

As you pay down your mortgages, your line of credit component would automatically increase. When you pay off $30K, you would have $30K to use as you wish. This “available limit” would increase to $130K once you pay your $100K down a year later, and so on. 

If you ever wanted to borrow money to invest into a rental property, the available funds would be right there for you to use, no application needed. And if you borrowed $100K to invest into a property, you could also lock it into a mortgage term and pay lower mortgage rates rather what you would get if you kept it in a line of credit. Moreover, you would be getting a separate mortgage statement for those $100K and in this way keep your investment mortgage (the interest on which is deductible) separate from your personal mortgages (non-deductible).

HELOC’s are the ultimate product solutions on the market. If you already don’t have it, it’s worth having a discussion about it.