Mailbag: HELOCs vs. Mortgages

Mortgage-Mailbag The Question:  A reader emailed the following question…

“What is the difference between a HELOC and a variable-rate mortgage? Why would someone want a HELOC instead of a mortgage?”

The Answer:  HELOCs and mortgages have important differences. We’ve contrasted certain aspects of HELOCs and mortgages before, but here’s a summary of the differences for reference.

Allow you to continuously borrow and re-borrow up to your available limit (i.e., they are “revolving”). Can only be paid down (unless they’re readvanceable).
Have rates that are not guaranteed for the life of your term. Lenders can increase the rate premium they charge on HELOCs at any time. (By the way, Kudos to lenders like FirstLine, National Bank and Canadian Tire, who have refused to raise LOC rates on existing customers.) Come in two flavours:Fixed…with mortgage rates that are guaranteed for the life of the

term.Variable…which have guaranteed spreads from prime for the life of the term (e.g.,  prime + 0.25% or prime – 0.50%).

Are fully open. Are usually closed but can be open.
Require 20% equity Often require just 0-5% equity
Offer interest-only payments Don’t generally allow interest-only payments
Are usually reported to the credit bureaus—which can negatively impact your score (only a handful of HELOCs are not reported) Are usually not reported to credit bureaus, and typically don’t harm your score even if they are.
Are technically callable by the lender—even if you make your payments on time. Mortgages cannot be called as long as you abide by the terms of the mortgage.
Have higher interest rates, as of today Have notably lower interest rates, for the most part

HELOCs are generally most suited to very financially stable individuals who value liquidity (quick access to their home equity).

Keep in mind, many of the things that make HELOCs unique can be either a benefit or a disadvantage, depending on the borrower. If you need help deciding if a HELOC is right for you, get some free advice from a mortgage professional.

  1. Rob:
    I hope this type of information is Ok to post.
    As someone who recently shopped for HELOC (to make a 20% pre-payment to my 5-Yr fixed mortgage), I have found CIBC had the best offering.
    They waive all fees to open the HELOC at P + 1%, if you borrow $30k for three months. I think the offer may still be available.

  2. have been with the Firstline HELOC for almost 2 years now. Not impressed. Very inflexible and a huge penalty should you wish to seek lower rates than they were 2 years ago (6% or so back then which I’m paying still, unfortunately).

  3. Hi Alan,
    Just to clarify, FirstLine’s HELOC is fully open and has no penalties.
    I assume you are referring to the fixed portion of a Matrix mortgage?
    As with most fixed mortgages, if you break early you can expect a penalty regardless of the lender.

  4. TD Bank in letter I received yesterday will increase HELOC rates
    to Prime + 1% as of Nov.16, 2009. Prime now at 2.25% will therefore increase 45%.

  5. How can these variable rate LOC’s be going up?
    I mean, variable-rate mortgages are going down. And libor is at an all-time low (0.29%) so banks can’t complain their funding costs are high. I just don’t get this move.

  6. ITS PURE GREED. I got the same TD Canada Trust letter increasing my HELOC rate to P+1. Banks finance their Variable-rate HELOC’s with demand deposits and last time I checked, the rate the big banks pay on their customers chequing account deposits are 0.00 to 0.25% so them complaining about higher funding costs is simply BS and pure greed.

  7. Got a letter from TD increasing my HELOC rate to P + 1% from Prime. Pure greed! I’m just going to transfer all my business (it is substantial) to someone that can give me prime on my HELOC. Simply as that!
    See ya TD.

  8. I’ve looked around…I can’t find anyone who will give Prime + 0% to a “new” customer. even if they move everything to them. Anyone had any luck?

  9. I have notice that Canadian Tire has not moved on the fixed rates at all which makes a dilema for me. I originally took the HELOC out so that I could lock later when rates started to rise. I have prime which is 2.25% currently, I have been offered to move into a variable with option to lock at better rates then CT, cost to move would be less then $1000……any advice. Thanks

  10. I also got a letter from TD about an increase of 1% on my HELOC. However I wonder if those who are with TD have a HELOC contract that describes how their interest rate is calculated. Mine says:
    Premium minus (whatever adjustment) = interest rate applied on my HELOC. There’s no componant in the formula allowing an increase. So I just wonder if TD has the right to increase the rate anyway (without increasing the prime).

  11. Home equity lines of credit are great for people with 20% equity in their homes. However many people with only 5% down on their home can still obtain a 10K+ line of unsecured credit fairly easily. It may not be at prime but it is a great option for those that need access to cheap funds. I currently have a 4.25% line of credit with Scotia. Your credit will clearly have an impact on the rates.

  12. FYI, It is going to cost me $270 to discrage my TD HELOC and another $600 the legal work on the new mortgage. I was offered 3.79 for 4 years from PC. The new rate at TD will be 3.25
    I hate them but they are still cheeper. I am going to give them a really hard time and will move my business out of TD when it suites me.
    Has anyone visited their lawer yet to arrange the new mortgage. It looks legal for them to do. Just not a nice way to treat the customer.

  13. Okay now TD appears to have followed everyone else no more HELOC at Bank Prime It is now Bank Prime +1% or 3.25%. Sounds like peanuts, but remember, it’s a pretty close $1,000 of cash per annum on $100,000 of mortgage right out of the customer’s wallet. THE RATIONALE I learned, EVERYONE ELSE HAS DONE IT, SO WE ARE JUST FOLLOWING SUIT. Catch is, if all banks are willing to spend cash and buy new business through advertising, and then follow-up in many cases by paying fees for appraisals and legal docs on new business imagine the mortgage customers knocking down the doors, if they rolled this major rate change back and were aggressive. Hey, you would think someone at would TD see the light and admit a mistake. I believe they would call such a shift or policy change, being a RESPONSIVE, RESPONSIBLE BANK THAT LISTENS AND VALUES EXISTING CUSTOMERS

  14. I have a HELOC with Firstline, tied to my mortgage (it increases as my mortgage is paid down). They lowered the HELOC rate to prime (2.25%) almost a year ago and have kept it there since then.
    Having said that, my broker told me that they are no longer doing that for new HELOCs. Those are now prime + 1%.

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