Using Your Home’s Equity (HELOCs)

Borrowing against your home equity can affect mortgage refinancing. Bet you weren’t banking on your HELOC (home equity line of credit) being payable in full when you looked for a new mortgage lender or reopened your mortgage to change the terms.

Axess Law discharges HELOCs against mortgages you refinance, freeing you from revolving, recurring interest-only debt. We finalize second mortgages you opt to take out instead of credit lines.

What Are HELOCS

Your bank or credit union probably encouraged you to get a HELOC when you took out your mortgage.

HELOCs let you use the equity in your home for unexpected purchases, like a new water heater, or splurges on anything you like. The bank wins by placing a collateral charge (secured by your home) on your mortgage. You can take cash whenever you want it, while paying continuous interest on your growing debt. 

HELOCs can be as much as the difference between your home’s appraised value and mortgages. Or as little as the bank prefers to loan. 

Purchases don’t have to be for your home. You could buy that new Dodge Charger or ski pass to your favourite winter retreat. Only you know if it’s a good investment — or if the interest you paid was worth it.

Who Qualifies

You may qualify if you:

  1. Have or want a low ratio mortgage (more than 20% down).
  2. Can show a good credit score — ask your lender what you need.
  3. Have ongoing, stable income.
  4. Your credit card or other debt is acceptable.

You can apply on your own or with a property co-owner, like your spouse, partner or a friend you have a shared mortgage with.

Mortgage Stress Test for HELOCs

Like a mortgage, you’ll have to pass a stress test when you use a federally regulated lender like a bank (credit unions and private lenders are exempt). It proves you could afford to make interest payments if mortgage rates went up significantly. Your lender will use the higher of 5.25% or an interest rate you negotiate plus 2% to calculate your risk.

How Much to Borrow

Your home can be financed for up to 80% of its value, provided you have 20% in a downpayment from your own resources. Your HELOC is the amount left over after deducting any mortgages you owe.

For example, if you paid $700,000 for your home, but it’s now worth $800,000, your mortgage minus a 20% down payment would be $560,000 ($700,000 – $140,000 = $560,000).

Since your home is worth $800,000, you would potentially have an additional $100,000 to borrow against its equity. You could take the full amount or, in case your home’s value declines, part of it.

What it Costs

Setting up a HELOC can incur:

  • a home appraisal to assess its value
  • legal fees to register collateral charges on your home 
  • title search fees to check for liens 
  • administration fees to set up and maintain your HELOC
  • life, critical illness, disability or job loss insurance fees
  • and discharge fees, if you cancel or pay out your HELOC.

Reach out to us if you have Canadian real estate law questions, including about HELOCs. (See our FAQs: questions to ask a real estate lawyer.) 

Pros and Cons of Home Equity Credit Lines

Pros

  • Easy credit, anytime you want it.
  • Only pay interest if you use it, but rates go up when markets do. 
  • Lower interest than unsecured credit lines or revolving credit cards.
  • No prepayment penalties.
  • Replaces fixed-rate consumer loans.
  • You don’t have to explain what it’s for. 

Cons

  • Variable rates for HELOCs can exceed mortgage interest.
  • Interest adds up over time.
  • Debt grows monthly unless paid in full.
  • Has to be repaid when your home is sold or you switch lenders.
  • Lenders can trigger a mortgage default if your HELOC isn’t paid.
  • Lenders can reduce the maximum limit or demand instant repayment.
  • Your minimum credit score suffers if interest payments aren’t made

How to Use HELOCs

You could use HELOCs to pay off other debt, upgrade your home to increase its value and enjoyment, go to college or invest. You can even consolidate debts with higher interest rates.

But should you? 

HELOCs eventually have to be paid back — when your lender demands it, which can be without notice, or when you sell your home or switch lenders. When investments you make using a HELOC drop suddenly or home renos don’t add to your home’s value, using a HELOC just increases your long-term debts.

Other Ways to Use Your Home’s Equity

Since HELOCs can be expensive to repay, consider other ways to leverage your home’s equity. 

Refinancing Your Home

If your home has gone up in value, explore refinancing with your existing lender. You can add to the value of your mortgage and use the difference to consolidate debts, buy vehicles or make home renos — anything you want.

You may have to pay more for interest if rates have gone up or you blend and extend your current mortgage to refinance. Plus lenders charge for appraisals, title searches, title insurance and Axess Law’s legal fees (ask if your lender will pay our fees, some will).

Applying for Private Mortgages

Private mortgages are second mortgages from family, business partners or private lenders. They cost more to set up than HELOCs and interest rates can be as high as 18%. 

Borrowers typically use second mortgages to consolidate debts using their home as equity or to fix credit scores for future purchases. Private lenders aren’t regulated by the Government of Canada and have no stress tests.

You can qualify with a lower credit score and if other lenders have turned you down.

Getting a Reverse Mortgage

Now your mortgages are paid in full, why not try a reverse mortgage? You can borrow back 55% of your home’s value and use it for day-to-day expenses, to buy a cottage or give financial gifts to family. 

You make no mortgage payments and only owe your lender if you sell the house or when you die. 

Why You Need a Lawyer 

What does a real estate lawyer do in Ontario? Axess Law liaises with your lender to formalize refinancing offers, including paying out HELOCs attached to mortgages you discharge. 

We can register HELOC charges on your mortgage and check for property or financial liens. If you have Ontario real estate law questions, we have lawyers near you. 

Take the next steps with confidence, knowing your mortgage documents are completed on time and for less than traditional law firms charge.

Book Mortgage Appointments Online

Call our 1-647-479-0118 lawyer line or use our convenient online booking form to make an appointment to refinance or finalize your mortgage. We’re open 7 days a week with long hours, at times that fit your schedule.

Axess Law meets with you at any of our Greater Toronto Area or Ottawa locations to sign mortgage documents or sends someone to your home or office. We have secure, online video conferencing software for e-signing and witnessing mortgage documents. 

Our mortgage refinance lawyers let you know when your refinance is complete and your HELOC is closed. 

Ask us today about handling your mortgage transaction.

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