HELOC Mortgage In Canada, a Heloc mortgage and a second mortgage are usually used interchangeably as a term, which is, in fact, quite erroneous. The Heloc is a revolving home equity credit line, where interest accumulates on the amount you have borrowed. This interest is based on your income and credit rating. As a borrowing instrument, the Heloc mortgage loan can be used to cover any kind of expense just like a second mortgage, except that everything paid over the interest due flows back into the account and can be reused whenever necessary. In most cases, Helocs have duration of up to 5 years. If you sell your house before you have paid off the credit line in full, it is covered through the money from the sale or through your savings. When setting the limit of the Heloc mortgage, the lender begins at 75 - 80 percent of your home’s appraised value. Then, the outstanding balance on your mortgage is deducted, and the lent amount is based on that remaining from the equity. The home equity lines of credit are appropriate for people who often find themselves in dire need of extra money. A second mortgage, on the other hand, involves a fixed payment and term of maturity. The amount you can borrow on a second mortgage is calculated based on the difference between your current home value and the outstanding balance on your first mortgage. This is known as the loan to value (LTV). LTVs for the first and second mortgages should not exceed 85 percent because banks are usually not willing to lend beyond this point. Moreover, the interest rate on second mortgages is usually fixed, and the term ranges from one to three years. Heloc mortgages typically involve variable interest rate that is based on some publicly available index. In this case, the interest rate to be paid changes, reflecting changes in the index value. With the cost of borrowing connected to the index value, it is wise to check which index is used and what the amount of the margin is. Some credit providers feature a discounted or introductory interest rate for a short period of time, e.g. six months. Heloc mortgage loans became very popular in the 1990s and early 2000s, but things started going down in the past five years. Having excellent credit rating, a history of financial prudence, and substantial equity is not enough anymore. Banks and other financial institutions providing such mortgages are playing it on the safe side. For instance, someone who made a down payment of 10 percent on a home worth $400,000 would owe $360,000. In the past, bank clients could get an equity line of credit of $40,000 one or two years later, with the property’s appraised value reaching $440,000. In that case, the client would owe up to $400,000 on the property but would still hold at least 10 percent in equity. However, if the value dropped down to $400,000 he or she would have no equity and could lose access to the credit line.