Mortgage Blog

Do you know how a HELOC works?

May 24, 2022 | Posted by: Doug Neufeld

A recent published report by the Financial Consumer Agency of Canada stated that almost 7 in 10 HELOC holders were only moderately familiar with how HELOC’s work.

Is that a big deal?  Probably not, as most people will HELOC’s use them sparingly and a basic understanding is generally enough for most borrowers

A HELOC is simply a revolving line of credit that is secured as a mortgage against your home.  It has a set limit of how much you can draw to borrow funds.  It is not an installment loan, and it does not have a fixed monthly payment like a traditional loan or mortgage

Some of the key benefits & features of a HELOC are as follows

1. It’s fully open – you can paydown any amount, or your entire balance in full at any time without incurring a penalty
2. It’s re-advanceable – you can draw and use the line of credit just like you would money in your bank account.  You don’t need permission to draw funds and you can access them anytime for any reason.
3. It allows interest only payments – payments on a HELOC are the lowest monthly payment of any loan or mortgage product as you are generally only required to make a monthly payment to cover the interest accrued.  At today’s rates for example an interest only payment on $100,000 would only be about $308/month.
4. Convenience – you can access your HELOC funds easily anytime you want via the following ways:

            - ATM Bank card

            - Cheque

            - Web Banking transfer

Some key points that most borrowers don’t know about HELOCs are the following

1. Your HELOC limit can automatically increase when a mortgage or other related products you have with your lender are paid down.
2. A HELOC is a Demand Loan.  Therefore, your lender can require you to repay your loan at any time.  And if you can’t repay the HELOC balance they can force you to convert your HELOC balance into a traditional mortgage product with a fixed rate and monthly payment of principal and interest.
3. Your lender can reduce your limit on your HELOC at any time.
4. The maximum limit your HELOC can be is 65% of your property value.
5. Your lender can increase (or reduce) your HELOC interest rate at any time at it’s discretion.

Many of these last points can be considered as a negative, but they generally only come into play at abnormal negative economic times, and even then, lenders treat them case-by-case based a borrowers credit rating, repayment record, home value and net worth.

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