HELOC vs. Variable-rate Mortgage

HELOC Lenders like National Bank and Canadian Tire have been attracting a lot of business lately thanks to their 4.00% variable HELOC‘s.  Not all borrowers realize, however, that HELOC’s are a slightly different animal than a regular variable-rate mortgage.

For one thing, HELOCs typically don’t have terms associated with them.  They are revolving lines of credit and lenders can usually increase HELOC rates at any time–with little or no notice.  HELOCs do not always have to follow prime rate.

Manulife’s One mortgage is case in point. The Globe says, “for the past nine years, until Oct. 10, the practice with Manulife One was to keep the so-called base rate exactly the same as the prime rate.”  Now the Manulife One is 1/2% above prime.  (You can read all the heated comments surrounding this development on RedFlagDeal’s forums, as well as Manulife’s response on their login page)

Envision’s Redfrog product, another readvancable line of credit, is second recent example.  Existing Redfrog customers have seen their line of credit rate jump from prime to prime + 1.65%!

Lenders can even call in HELOCs if they really want to.  Most HELOC’s are therefore similar to demand loans.

So given all this, would a lender like National Bank or Canadian Tire ever raise rates above prime on existing clients?  Moreover, would they ever call in their HELOCs on good paying customers?

Both are technically possible but most mortgage advisors would tell you that neither are highly probable.  Doing so would not be conducive to repeat business and neither of these two lenders appear to be having severe profitability or funding cost issues.

  1. Manulife One customers are upset not just because it always followed prime and suddenly stopped. But because we were sold the product under the detail that it WOULD always follow prime.
    There are plenty of marketing materials and recounts of pitches from advisors that made such claims. It was all over their own website (until the community pointed it out an Manulife removed the online materials).
    It was sold as a Prime rate product. They changed their minds. Bait and switch. stay away form Manulife Bank.
    Read the thread linked in my posting to see the evidence.

  2. I feel bad for M1 customers, paying monthly fees AND not prime
    Luckily our TD HELOC is at prime still, and we’re benefiting from Variable mortgages, especially with another rate cut coming Dec 9
    Thanks for clearing up HELOC and Variable, it’s funny when I think that people can go for HELOC at Prime vs Variable at Prime+1% or 2%

  3. Jerry,
    HELOCs and VRMs aren’t the same product. HELOCs are secured against your home, while VRMs require a downpayment and an application for a mortgage. In a VRM the secured property is the new property you’re purchasing while a HELOC secures the loan against an existing property in your name. Its easier to get a HELOC than a VRM. hence the differences in rates between the two products.

  4. Proud to be an RBC client! It is in times like this when I’m glad to be a client of a major financial institution. All those rate seekers are getting screwed right now by inferior products offered by other institutions in Canada right now. Remember, rate isn’t everything… Next time your mortgage comes up for renewal, remember that sometimes the lowest rate or best marketing isn’t the best. Would you change Dentist’s just because they have discount prices and flashy marketing??? I think not.

  5. Didn’t I hear recently that RBC had about the highest interest rate on their secured lines of credit for new customers (at prime plus 1.20%)?
    Who were the only two lenders to hold out on bringing down their prime rates to 1.75% over the BoC rate? That’s right, TD and CIBC.
    If you love the Big Banks, good for you! There’s lots of alternate options out there that sometimes offers better value.
    Manulife just so happens to be one bad apple in the bushel basket.

  6. Almost all big banks are at prime + 1% or more on variables. RBC isn’t much better. Why would anyone pay RBC prime + .85% for a Homeline versus prime to National Bank?

  7. National Bank is clearly losing money right now on that product to build market share. And good for them! However, it can’t last forever.
    Why would someone want a RBC Homeline over National Bank? First, once things return to normal, RBC Homeline clients have access to Variable Rate segments at Prime minus. I personally have an open/variable segment at Prime -0.5% which was setup in January 2008. Clients can also “lock-in” a fixed rate segment if they’re uncomfortable with fluctuations.
    Secondly, do a Google about the National Bank “All in One” product… lots of forums detail the small annoying features. If you try a similar Google for the Homeline, you’ll find nothing negative. It’s seamless!

  8. Nacks
    National Bank has all the same positives you attribute to the RBC Homeline. Plus they have great features the RBC doesn’t including all-in-one functionality, way more sub accounts, chequing in their sub accounts, a nice banking package with each sub account, etc.
    There are no annoying features when compared to the Homeline.

  9. Nacks
    For the customers looking to take out a new mortgage/HELOC in today’s economy, would they be better off with the Homeline (with a mortgage and HELOC at prime PLUS)or a One account through Canadian Tire or National Bank at prime?

  10. What are the rates on the National Bank sub-accounts? Are they at Prime as well?
    Vince, just to clarify, I purchased with a HELOC and a 10% downpayment.

  11. HELOC’s are not only for existing properties, but can also be applied to a new purchase.
    National Bank had “their own” NBC Prime for MANY years, and have only recently reduced it to match regular Prime. There’s nothing stopping them from reverting to a higher NBC Prime rate.

  12. Since October 15th, any re-drawable / re-advanceable mortgage product cannot by insured by any of the default insurers and therefore need a minimum downpayment / equity of 20%. We have to keep this in mind when comparing National’s AIO to any current VRM products, as they need as little as 5% downpayment / equity

  13. I remembered reading that Mortgage is easier than HELOC, so which one is it? One is a mortgage, one is a loan :)
    and my HELOC is against a new purchase (setup with the offer and 20% down), so it’s almost exactly like VRM except I could pay interest-only if I want, and rate is at Prime
    HELOC is great for SM as well, in this economy. Dividend yields are higher than Prime!!

  14. I just applied for NBC All-In-One approval, they told me that they have rate guarantee at prime for 5 year term. Is this not true?

  15. Hi. National Bank can change its HELOC rate at any time as far as I know. I don’t think they guarantee prime. You may want to read your commitment Ti.

  16. All companies who offer Helocs or VRM can adjust the rates at anytime. A prime rate may disappear (usually for new clients). Regardless, many believe that Helocs and VRMs will, over the life of the mortgage be lower than posted 5 year rates. In terms of all-in-one accounts, the argument is that it offers a low rate on the mortgage and puts your chequing account to work at paying debt til it’s needed. If your get a good rate somewhere on your mortgage but they pay you virtually nothing on your savings, you’re money isn’t working for you.
    If you go heloc, make sure you have your income flowing through the account or move all access cash onto the line of credit until you need it.
    Happy heloc, VRM mortgage hunting.

  17. Hi
    I am in the process of getting my mortgage renewed. I have just come across HELOCK and would like to know the precise benefits of the HELOCK against the Mortgage renewed
    please advice.
    My House is Valued at $350,000.00
    My remaining Mortgage is $107,500.00
    If i go with helock what are the benefits and what r the drawbacks

  18. shafik …
    Well, with TD it’s pretty straightforward. Let’s say they allow 75% of the house value. You would get a HELOC that totalled $262,500. They would then take $$107,500 of the $262K and use that as a mortgage, with the same terms, conditions, benefits, payment, and choice as a “regular” mortgage. For example, you could opt for that part of the HELOC to be a variable-rate mortgate (current rate 3.2% with a .5% discount). Your mortgage would appear as such under TD’s web interface, as a separate entity from your HELOC. YOu can think of this as having a secured line of credit and a mortgage.
    With the mortgage in place you would have the difference – $155,000 – available in the HELOC for any purpose you choose. As your mortgage payments are applied, the principle part of each payment goes back into the HELOC, thus increasing its value. Assuming you didn’t touch any money in the HELOC for the life of the mortgage, when the mortgage was paid off you would have the original $262,500 in the HELOC for use as you see fit.
    The TD HELOC (the home equity part) can be configured to either be an interest-only account, where each month only the interest payment on money used from the HELOC side is withdrawn from your account, or any other type of payment type you want. Naturally an interest-only payment plan would never decrease the principle amount taken from the HELOC, so most sane persons also make payments to pay down any HELOC balance (except perhaps when using the full loan’s interest to reduce taxible income against income producing equities – but that’s a different story).
    So, what it looks like to you is you have received a line of credit that maxes out at $262,500, of which you have assigned that $107K will be treated as a mortgage. Unless you’re the type that spends every cent you can get your hands on, I see no downside to a HELOC and in fact, its benefits (immediate access to whatever balance is in the account at a given moment) make this a no-brainer for me.

  19. You can make your mortgage payments for your principal residence tax deductible. Using a Home Owners LIne of credit way. There are a lot of mutual funds that have a fixed distribution schedule that pays 6-8 % even in a crazy market like 2008. Sell of your investments and repurchase it with the new HELOC. the proceeds from teh sold off investments can be used to pay down mortgage.

  20. Another way to go is to Get a HELOC and purchase WHOLE LIFE INSURANCE. WHOLE LIFE INSURANCE ( to a certain limit ) can provide TAX FREE INCOME AND TAX SHELETERED INVESTMENT FOR THE FUTURE.

  21. Can some one help me? Does the national bank HELOC product has a prepayment penalty for early closing?
    Regards
    Aaron

  22. Can some one help me? Does the national bank HELOC product has a prepayment penalty for early closing?
    Regards
    Aaron

  23. Hi Aaron,
    If you place your mortgage in the open HELOC then there are never penalties for paying your principle.
    If you have a locked in portion plus a HELOC portion, then penalties apply to the locked in portion only.
    Cheers,
    Rob

  24. Hi..
    I need some advice. Can anyone tell me the benefits of going with an RBC Homeline versus their regular Secured Line of Credit? I really don’t want to change any of the terms and conditions with the mortgage I already have in place?
    Thanks,
    Gena

  25. Can someone please help me distinguish the pros and cons between HELOC and VRM? HELOCs offer really low interest right now but how are they calculating the interest versus the VRM or the credit card? How about the property titles – who does it belong to? What is the catch of HELOC — these days, everyone seems to jump into this bandwagon. It seems too good to be true. Thanks.

  26. Variables have guaranteed spreads to prime
    HELOCs don’t and their rate can change at the lenders whim
    I would disagree that people are jumping on HELOCs
    There are very few HELOCs around at good rates and the risk is technically higher

  27. Thanks John. Currently, our bank’s staff rate is offering at 2.5% for HELOC. Most of the staff have converted to HELOC. What other risks associated with HELOCs that would make it higher than VRMs? Would you suggest that I should stick to VRM at 4.5%? I know that some customers were pretty upset when all the banks decided to change the fixed spreads at prime from a Minus to a Plus 1% back in November. Your advise is appreciated, I’m close to renewing my fixed rate mortgage. =)

  28. I have been reading all of your comments re: HELOC VS VRM. I am wondering why no one has discussed the fact that products like M1 calculate simple interest vs. compound. I am currently a M1 member and so far I love it. I have done several calculations and my rate on a VRM would have to be pretty darn low to overcome the compound interest factor. It is so convenient and I just don’t have the time to keep shopping around for the lowest VRM rates. If I could refrain from increasing my borrowing, I will have my debt paid off in a very short time with M1. Any comments out there on this simple vs compound factor?

  29. Hi Natalie. Just curious. Could you explain specifically what you mean by simple interest? I’m just learning all this stuff for our first mortgage.

  30. Hi Jenny. BAsically with compound interest you are paying interest on interest so to speak because everything dates back to when you originally borrowed. With simple interest,your interest is calculated at the end of each business day so if you happen to deposit $5000 bonus on a given day, your calculated interested that day is on what you originally borrowed minus that 5000 and this happens instantly. I don’t think I am the best one to explain this concept but there is plenty of info if you google it. I know manulife one is getting a bad rep right now because they are a bit above prime but the simple interest, I feel, makes up for it. You can check out their website for the details. I do know that National Bank is the only bank with a product similar (here in NB anyway)

  31. Hi,
    Could anybody help me on this??
    I bought this house (in langley ,bc) 2 years ago and my mortgage is locked for 5 years at 5%.Now i am thinking to refinance it just to lower the monthly payment b’coz intrest rated have gone down.I don’t want to get extra money from bank.So my question is which option is better?Refinancing my first mortgage with paying 2200$ as a penalty and i can get at 3.8% for 1 year locked for 35 years mortgage OR I should get HELOC at 4% for 25 years??Which is better.Please help me out.Thanks. I bought my house for 420000 and it’s present value is 485000.

  32. Amit
    If you’re refinancing a 5-year fixed and moving to a HELOC, variable or a 1-year to save 1%, that is risky IMO.
    The shortest term I would be inclined to go with is a 3-year fixed at Merix for 3.75%.
    This is my general feeling and not a recommendation since I don’t know your specifics. Sounds like you should probably talk to a mortgage broker/specialist.
    John

  33. can someone tell me how is heloc different than mortgage, considering you are paying the same rate on mortgage and heloc, will you be mortgage free faster with heloc?
    if I have a 300000 mtg at 4% or if I have 300000 Heloc at 4% and I keep the payments same like 1400 a month will I be better off with HELOC(simple interest) or Mortgage(semi-annual compounding)?

  34. Mortgages can also be simple interest or compound interest. However, all mortgages are simple interest except those involving negative amortization, where the payment does not cover the interest. (If unpaid interest is added to the balance, as it is on a negative amortization loan, in future months, interest is calculated on a balance that includes unpaid interest, which makes it a compound interest loan.) Absent negative amortization, all mortgages are simple interest.

  35. Ash it depends on the compounding frequency and how you use the HELOC. If it is a combined account (like the M1) then you may pay it off faster than a regular mortgage. What do you mean by simple interest?

  36. most mortgage are based on semi-annual compounding, simple interest is in HELOC, where there is never any compounding. you pay interest on the remaining balance.

  37. I have read recently that there has been a lot of repricing on this mortgage – is national bank still a good option? …are there other HELOC providors that you would suggest?
    thx

  38. I have TD HELOC and just received notice that from Nov 16, I would be paying prime plus 1 %, instead of prime rate. This product was sold to me with clear understanding that I would be paying prime as long as I have LOC. What are my best options now?

  39. Does anyone know of a HELOC being offered at Prime?
    I believed the TD would honor my HELOC at prime. No such luck… just got my letter that as of Nov 16th it would be Prime + 1%.

  40. I have signed up with CDN tire one and only ..I have a fixed portion and a variable portion . In the first year I paid off 3 times the principal off my loan. Compared to previous years with my fixed rate mortgage which I was exercising a 10 percent additional payment . I am way ahead . When I pay off the variable portion .. If the rates are still good I will make lump sum payments to bring the fixed portion down . Best of both worlds . Security in my fixed portion and great rates in the variable portion .

  41. I have a beef about the RBC Homeline mortgage. It’s made out to be a HELOC, but isn’t. If I had a secured LOC on my home at the credit union, my account would show a negative balance. Any funds I deposited would apply directly onto the amount owing, thereby bringing down the amount owing on the account.
    RBC’s Homeline mortgage has 3 accounts. One, the bank account; two, the mortgage account; and three, the equity account.
    The funds you put into your account are not applied onto your mortgage, and you have to go into the branch to get access to the equity in LOC account.
    I don’t what other’s have experienced, but RBC has found a way to make as much off me as possible while eroding any possible benefit I could have derived from having a mortgage and LOC in one account.
    If I could switch to a proper HELOC I would do so…and am still looking around.

  42. Also, I don’t understand this interest situation. Doesn’t paying interest each month, although called “simple interest” become 12 months of compounded interest, as opposed to one compounding every six months? Wouldn’t that mean paying more in interest, rather than less??
    Thank you!

  43. Hey Guys,
    I currently have a varaible mortgage that will be maturing in 18 months from now.Recently, an insurance broker is advising that I opt for Heloc right away;that the savings will accomodate the penalty to be paid.My rate is Prime- 0.6 as against the Heloc rate of Prime+0.5 to 1%.Does it make sense to go with a heloc that has a higher interest rate?I am confused!!!

  44. Hi Adio,
    Thanks for the question. It’s tough to comment because I don’t know your circumstances or the context behind that insurance broker’s mortgage recommendation.
    That said, I can comfortably say that it’s hard to save interest by paying a higher interest rate. :)
    Maybe he was suggesting you get a variable mortgage with a better discount, and then add a HELOC to it? Or does his strategy involve rolling in some higher interest debt? Perhaps you can have him explain himself a bit better.
    Cheers,
    Rob

  45. Thanks Rob!
    He is trying to get me to subscribe to universal life insurance.He feels that the monthly rate (1635.00 by weekly instalment) that I pay right now for my mortgage could be reduced to as low as 900.00 a month if I opt for the HELOC.500 dollars out of the savings made would now be channelled towards unversal life insurrance which would also yield 160,000 dollars in surrender value at maturity in 20 years.
    Hope this provides enough background for an expert opinion to be made.
    I appreciate your candid response.
    Adio

  46. Hi Adio, This is a multivariate question that needs to be discussed live with a mortgage professional. I’d also recommend the advice of an independent financial planner licensed in insurance. Rob

  47. Great advice from Rob and the key here is professional “independent advice” to go over the numbers is crucial since universal life insurance products are a part of lifetime financial planning, permanent and in layman terms not easy to understand.

  48. Hi,

    I currently have an all-in-one line of credit with NBC. I’m currently just paying prime . I’m wondering if ever the bank goes prime minus, does it apply only to VRM or also to HELOC?

    Thanks!

    1. Hi Jonathan,

      National Bank has variable-rate mortgages below prime right now. As far as I can remember, however, NBC has never set its regular All-in-One HELOC rate below prime. Nor do I expect it to. You’re already way ahead of the crowd at prime + 0%.

      Cheers,
      Rob

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