How the result is calculated
A home-equity line of credit, or HELOC, is a credit limit secured on your home. You draw on it as you need, pay interest on what you have drawn, and the home stands as security. It is a North American product: in the United States and Canada banks sell it to homeowners as a matter of course, while elsewhere equity is usually borrowed with a further advance, a top-up loan or a second-charge mortgage, all fixed instalment loans.
Two questions decide whether a line works for you. How much will a lender let you draw? And what will it cost, both while you draw and once you have to pay it back?
The limit starts from the value of the home. Lenders will lend against a share of it in all, the mortgage and the line together, and the line is what is left after the mortgage.
Limitc × V − M
- V
- the home's value
- M
- the mortgage still owed
- c
- the combined limit: the share of the value the mortgage and the line may take together
The cost depends on the draw period and the repayment period. While you draw, most lines ask only for the interest, so the payment is the amount drawn times the monthly rate. When drawing ends, the balance is repaid in level monthly payments over the repayment period, with the same formula as any other loan. The calculator runs this as one schedule, interest only for the draw period and then repayment, assuming the whole amount is drawn at the start.
Worked example
| Item | Amount | How it is obtained |
|---|---|---|
| 85% of the value | 340,000 | the lender's combined limit |
| Less the mortgage | 200,000 | |
| Line available | 140,000 | no federal cap; the 85% is the lender's |
| Drawn | 40,000 | a tenth of the value, at 7.5% |
| Payment for ten years, interest only | 250.00 | 40,000 × 7.5% ÷ 12 |
| Payment for the next 15 years | 370.80 | PMT(7.5% ÷ 12, 180, 40,000) |
| Total interest over 25 years | 56,745.64 | 30,000 while drawing, the rest while repaying |
The ten interest-only years cost 30,000 and repay nothing: at the end of them the 40,000 is still owed in full, and the payment rises by 120.80 a month.
| Item | Amount | How it is obtained |
|---|---|---|
| 80% of the value | 560,000 | the most a lender may go without insurance |
| Less the mortgage | 350,000 | |
| 65% of the value | 455,000 | OSFI's cap on the revolving line |
| Line available | 210,000 | the lower of 210,000 and 455,000 |
| Drawn | 70,000 | at 5.1%: 297.50 a month interest only |
| Payment over 20 years once repaying | 465.84 | after five interest-only years |
With only 50,000 owed on the same home, the 80% rule would allow 510,000, but the revolving line stops at 455,000: anything more would have to be an amortizing mortgage.
Reading the result
The headline is the largest line the figures allow, and the caption gives the two payments on the amount you draw. Combined loan-to-value is the mortgage plus what you draw, as a share of the value; many lenders price the line by it, and a figure near the limit leaves little room if prices fall.
The stat row repeats the two payments with the total interest and your equity before the line. The chart and the table show the schedule year by year: interest only through the draw period, then principal and interest until the balance is cleared. The per-month view gives every payment.
What changes the result
The lender's combined limit. An American lender at 80% instead of 85% would offer 120,000 rather than 140,000 on the opening home. In Canada no lender may go past 80%, however you set it.
What you owe on the mortgage. Every unit of mortgage repaid raises the line by one unit, until a Canadian line reaches its 65% cap.
The rate. A HELOC rate is variable: usually the prime rate plus a margin. A rise of one point on 40,000 adds about 33 a month during the draw period.
Interest only or not. Paying principal from the start spreads the 40,000 over all 25 years at 295.59 a month, avoids the jump, and cuts the total interest because the balance falls from the first month.
The periods. A longer draw period means more years of interest on the full balance; a shorter repayment period means a bigger jump at the end of the draw.
What is not included
The rate you enter is held for the whole term, though a real line's rate moves with the prime rate. The line is treated as drawn in full at once, whereas most borrowers draw in stages and pay less interest early. Annual fees, closing costs, appraisal fees and early-closure fees are not counted. Lenders also qualify you on income and credit, and in Canada at the minimum qualifying rate, so the limit here is what the home supports, not necessarily what you will be offered. In the United States, interest is deductible only where the money buys, builds or substantially improves the home securing the line, within the 750,000 dollar limit on mortgage debt.
Using the result
Look at the payment after the draw period before the one during it, because that is the payment you have to be able to afford in ten years. If you need the money once, for a single project, compare the line with a fixed-rate loan or a refinance, which do not change with the prime rate. If you take the line, decide on a repayment plan from the start rather than paying interest only for as long as the lender allows.