HELOC in Canada: Minimum requirements for a home equity line of credit

A home equity line of credit or HELOC is a great way to unlock the value of your investment in home. Because a HELOC is a secured line of credit, you gain many advantages.

• The interest rates are more reasonable than those of credit cards.
• Prepayment penalties are nonexistent.
• You can withdraw large sums of money when you need them.

These credit lines offer great benefits but are available only when you meet the basic requirements, such as minimum equity requirements, as well as having strong credit and fully confirmable personal income (business for self, or salary, is acceptable as long as the income is declared).   In some cases, stated income credit lines may be available for those with strong equity and exceptional credit..

Minimum Equity Requirements For A HELOC

A home equity line of credit is generally offered to borrowers only if they hold a minimum of 20% equity in their home, and as much as 25% in urban cities.  Rural locations can be more, if they qualify at all.   HELOCs are rarely available on farms or specialty properties. This limit is enforced to ensure that the borrower owns a reasonable amount of their equity so that the lender is safeguarded. In fact, the higher the home equity the borrower has, the better the interest rates he/she will be offered on a HELOC. This minimum equity requirement may vary a little from lending institution to institution, but 20% is the absolute minimum industry-wide.

You can typically have access to 80% of your current equity in your home. The owned home equity is estimated by deducting the mortgage liability from the current market value of the home. For instance, if your home has a market value of $300,000, and you owe $200,000, your equity stake is $100,000. Since you can borrow up to 80% of the value of your home, you can then borrow up to $240,000. Given you owe $200,000 still, you could borrow the remaining $40,000 in equity.

The 80% limit is law, and is designed to lower the risk to the lender against unfavorable real estate market situations or financial conditions of the borrower.

Other Requirements For Getting A HELOC

The lenders also run a financial background check on the homeowner to assess his/her capability to repay the loan withdrawn from the home equity line of credit. The credit history plays a role in getting a HELOC approved and in deciding your interest rate. Your debt to income ratio also has a part to play in assessing your risk as a borrower.

The home’s value is appraised to determine the equity value and all owner documents are verified to ascertain ownership and the mortgage position on the property. Proof of steady income and ability to repay the loan is also assessed. If you are a self employed person or have an unsteady or fluctuating income, you may have to convince the lender of your ability to repay the loan liability. The lender will also seek documentation regarding previous second mortgages on the property and their repayment history.

All these requirements including the minimum equity requirements for HELOC have been put in place to ensure that the lender and borrower’s risk is minimized. It’s to protect you and the lender!

Is A HELOC The Right Choice For You?

Although taking out a HELOC can be incredibly beneficial for homeowners, both in the short and the long-term, pursuing this option under the wrong circumstances can be a big mistake.

To that end, you should never make the decision to take out a HELOC on a whim. Instead, take all the time you need to consider whether it is truly the right option for your specific circumstances. There are a few questions you should ask yourself to help you determine whether it’s practical for you to take out a HELOC.

One of the most important things to consider before taking out a HELOC is whether the funds are meant to provide a temporary fix or a practical investment. Many homeowners are able to consolidate their debt and greatly reduce their total interest rate on that debt by taking out a HELOC. However, doing so if you struggle with budgeting or you want to make purchases that are impractical based on your financial situation can leave you under a mountain of larger debt that you’ll later struggle to pay off.

This is why it’s critical that you speak to a HELOC specialist who can guide you given your current personal and financial situation.

For example, a good use of a HELOC is for home improvement or renovation expenses, which are likely to add value to your home, providing financial benefits well into the future.

Similarly, using HELOC funds to invest in your education or in a business venture may result in the eventual increase of your income and financial assets. You should be pragmatic with your HELOC funds, and be sure to crunch the numbers to determine whether it’s really worth it for you.