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Decades of low borrowing costs established home equity lines of credit, or HELOCs, as Canadians’ top choice for financing anything from kitchen facelifts to third-floor additions.
But as rates started climbing in early 2022, many homeowners were quick to trim back on their use of these variable-rate revolving loans that allow for interest-only payments. Today, 57 per cent of those credit lines in Canada carry a balance, down from 67 per cent before the pandemic, according to data from Equifax.
Now, with interest rates declining, lines of credit are once again becoming less expensive. But with borrowing costs still elevated, HELOCs haven’t quite regained their status as the obvious option for major home repairs and renos. Instead, they are just one financing option among several that homeowners may want to consider, mortgage experts say.
It’s easy to see why the prospect of tapping a home equity line right now still gives some borrowers pause. The most competitive HELOC rate advertised on financial-literacy site Wowa.ca as of Aug. 1 was 6.85 per cent. For a balance of $50,000, that works out to $285 a month in interest payments alone.
By comparison, the lowest variable rate for refinancing a mortgage is currently 5.7 per cent, according to Wowa.
HELOCs 101: What is a home equity line of credit?
“HELOCs are typically a prime plus something, with a variable mortgage rate, typically what we see is a prime minus something,” said Tuli Parubets, a mortgage agent with Mortgage Scout.
(The prime rate is the benchmark lenders use for floating-rate loans, such as variable-rate mortgages and lines of credit. It usually goes up or down after movements of the Bank of Canada’s key interest rate.)
The perennial advantage of HELOCs, on the other hand, is flexibility, said Francis Hinojosa, a mortgage broker and CEO at Tribe Financial Group. A HELOC works similarly to a credit card: You only borrow what you need, when you need it. And as you repay what you owe, you free up room to take funds out again.
That feature makes HELOCs ideally suited to financing complex renovations, which come with high chances of cost overruns and delays, Ms. Hinojosa said. On the flip side, it also means that, if your home-improvement project comes in underbudget, you’re not stuck having borrowed too much money.
Another advantage is you can pay off your line of credit at any point without penalties. Although borrowers should also keep in mind that lenders can lower the credit limit on a HELOC or demand repayment at any time.
Still, a HELOC also comes in handy when the start of the renovation is still months away, Ms. Parubets said. Opening a line of credit means you’ve secured financing but won’t have to begin borrowing until the work is under way.
But if your home improvement is urgent – for example, you need to waterproof the basement before the next major rainstorm – or if a HELOC rate just seems too high, getting creative with your mortgage may be the way to go.
Still, a straightforward refinance process – in which you break your current mortgage to borrow an additional amount through a new loan – can be unappealing for many reasons right now. You’ll face prepayment penalties, which can be particularly steep if you have a fixed-rate mortgage.
And if you’re in the lucky position of having secured a low fixed rate at the height of the pandemic that won’t come up for renewal for another several months, you might be understandably loath to let go of it sooner than you need.
To many homeowners in this scenario, Ms. Parubets suggests a blended mortgage, which involves combining your existing rate with a new rate. The rate you’ll pay is somewhere between the two, and you won’t have to worry about penalties.
“Blended rates are saving the behind of Canadians,” Ms. Parubets said, adding that the option has become very popular among her clients.
But borrowing against your home usually isn’t an option if you have less than 20 per cent equity in it. If you’re buying a home with a smaller down payment and the property is in urgent need of work, you might want to consider what’s known as a “purchase plus improvements” mortgage, Ms. Hinojosa said.
These loans allow homebuyers to borrow an additional amount – usually up to a few tens of thousands of dollars or a small percentage of the home price – for renovations. The extra funding is usually based on the expected increase in home value of the property once the work is done. And the money can only be used for agreed-upon home improvements, with firm quotes from qualified contractors.
The best choice ultimately comes down to the math and the borrowers’ circumstances, Ms. Hinojosa said.
But regardless of where interest rates are, if you opt for a HELOC, you must have a plan to repay it, Ms. Parubets said.
“If you’re going to carry a balance and it’s on a never-never plan, you need to take a pause and you need to rethink your finances.”
