Most major financial institutions offer, under various house brands, a home equity line of credit combined with a mortgage, also known as a home equity mortgage.
This margin is offered as part of a fixed-term mortgage.
In general, there is no fixed amount to repay on a home equity line of credit. The lender only requires payment of interest on the money borrowed.
A fixed-term mortgage has an amortization period. You must make regular repayments of principal and interest according to a payment schedule.
The limit for a home equity line of credit combined with a mortgage is a maximum of 65% of the purchase price or market value of your home. As you pay off your mortgage, the amount of available credit increases, until this limit is reached.
Using a Home Equity Line of Credit Combined with a Mortgage to Buy a Home
You can finance part of your home purchase with a home equity line of credit and the other part with a fixed-term mortgage. Determine with the lender how you will use each portion to finance the purchase of your home.
Your down payment must be at least 20% or the equity in your home must be at least 20%. Your down payment (or equity) will need to be higher if you finance your home purchase with a home equity line of credit only.
Create sub-accounts in a home equity line of credit combined with a mortgage
A home equity line of credit combined with a mortgage can include other types of financial products within the same credit limit.
You may request to add these financial products under your home equity line of credit combined with a mortgage as sub-accounts. These financial products may have different terms and interest rates than the home equity line of credit.
You can also use the home equity line of credit to pay your debts contracted with other lenders.
A home equity line of credit combined with a mortgage requires discipline. Otherwise, you risk going into debt beyond your ability to pay.
Independent home equity line of credit
An independent home equity line of credit is a revolving credit product secured by your home. It is not linked to a mortgage.
The credit limit of an independent home equity line of credit:
can be up to 65% of the purchase price or market value of the home
does not increase as the principal of the mortgage is repaid
You can apply for an independent home equity line of credit with a lender that offers this product.
The independent home equity line of credit can be an alternative to a mortgage. You can choose this option instead of a mortgage to buy a house.
By buying a home using an independent home equity line of credit instead of a traditional mortgage:
you can repay principal and interest as you wish, with no fixed schedule
your down payment or equity will need to be higher (at least 35% of the purchase price or market value)
Using a mortgage line rather than a mortgage can provide flexibility. You can repay the amount of capital of your choice at any time. You can even pay off the full balance with no prepayment penalty.
Home Equity Loans
A home equity loan is different from a home equity line of credit. With this type of loan, you are paid a single lump sum. This amount can represent up to 80% of the value of your home. You pay interest on the full amount.
This loan is not a revolving credit. You must make fixed repayments over a determined period and according to an established schedule. Your payments are used to repay principal and interest.
Eligibility for a home equity line of credit
You must demonstrate your eligibility and obtain approval only once for a home equity line of credit. When you are granted a home equity line of credit, you can access it whenever you want.
You will need:
a down payment or home equity of at least 20% or
a down payment or home equity of at least 35% if you want to get an independent home equity line instead of a mortgage
Before accepting your home equity line of credit application, your lender will ask you:
an acceptable credit rating
proof of sufficient and stable income
an acceptable level of debt in relation to your income
To qualify for a home equity line of credit with a bank, you must pass a “stress test”. You must prove that you can make the payments at an eligible interest rate which is usually higher than the rate stated in your mortgage agreement.
You must pass this stress test whether or not you use mortgage default insurance.
Credit unions and other non-federally regulated lenders may choose to use this stress test for a home equity line of credit. They don’t have to.
The bank must use the higher interest rate between:
the interest rate you negotiate with your lender, plus 2%
If you’re a homeowner and want to use the equity in your home to get a home equity line of credit, you’ll also need to:
prove that you own your home
provide your mortgage information, such as mortgage balance, term, and amortization
allow the lender to appraise your home
You will need to ask a lawyer (or notary if you are in Quebec) or a property rights company to register your house as security. For more information, you can contact your lender.
Optional credit insurance
When a home equity line of credit application is approved, your lender may offer to purchase optional creditor insurance.
It’s a life, critical illness, or disability insurance product that can help you make your payments or pay off your home equity line of credit balance, usually up to a certain amount. if :
you lose your job
you are injured or become disabled
you become seriously ill
You are not required to obtain this credit insurance for your home equity line of a credit application to be approved.
This protection is very limited; so you should read its terms carefully and ask questions about what you don’t understand before signing up.
Before you purchase optional creditor insurance:
check if you are not already covered through your employer for the repayment of your debts in the event of death or disability
compare the protection provided by other insurance products, such as life insurance or health insurance, to determine which one meets your needs and offers the greatest value