Home equity lines of credit are one of the most popular ways of getting secured credit lines in Canada. Their popularity can be attributed to the immense flexibility and low rates of interest that they come with. Also known as HELOCs, these are credit lines similar to the credit cards, which are secured by the owner’s equity in home. Usually home owners can get up to 60-80% of the value of their home equity as HELOC, which can be used for all types of big and important expenses. Canadian home equity line of credit is easy to get and many big and medium sized lenders offer great deals on this kind of credit line.
Canadian home equity line of credit is primarily of two types:
1. Definite Term HELOC
Definite term HELOC, as the name suggests has pre-decided maturity period. This period is further divided in two parts: the draw period and the amortization period. The draw period is the time when the home owner can draw money from the credit line and this period usually lasts about three to ten years. During this time, the borrower only needs to make interest payments and repayment of principal is dependent on his/her will and is not necessarily required. After the draw period, the borrower can no longer take credit from HELOC or second mortgage. This is succeeded by the amortization period, in which the home owner’s credit liability is amortized over the entire remaining term (which can extend from five to fifteen years). In this period, the borrower has to make both interest and principal payments.
2. Indefinite Term HELOC
Indefinite term HELOC can last for an indefinite time and does not have distinct draw and repayment periods. This works very much like a credit card, where the credit is drawn, revolved and repaid on demand. The credit draws are limited by a preset credit limit, beyond which you can not withdraw money from the line of credit. In indefinite term HELOC, you can either make interest only payments or also repay the principal amounts whenever you like without any prepayment penalties. The interest is levied on the outstanding account balance. Most of the equity loans in Canada fall in this category. These are generally given out to individuals with a good credit standing and history. They come at low rates of interests and have high credit limits.
Credit limit on HELOC is decided based on the value of the property and loan to value ratio. The higher the loan to value or LTV ratio is, the smaller will be the credit limit made available to the borrower. The highest credit limit set in Canada for HELOCs is 80% of the home equity value. Depending on the credit and financial profile of the borrower and LTV, this percentage is determined. The lower risk borrowers get higher credit limits and individuals with relatively bad credit history get lower credit limits. Some types of insured Canadian home equity line of credit also come with credit limits as high as 95% of the owner’s home equity value.