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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.

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Last modified: April 28, 2014

Robert McLister is one of Canada’s best-known mortgage experts. A mortgage columnist for The Globe and Mail, interest rate analyst and editor of MortgageLogic.news, Rob has been covering Canada's mortgage market since 2007.