- So one thing that I swore I would never do
was start a video with so.
I get asked all the time.
I mean, I literally watched a video yesterday
from a YouTuber where the guy said,
"I get asked all the time, what's your net worth?"
And quite frankly, nobody's really asking him his net worth
because quite frankly, most people probably don't care.
And secondly, guess what?
That's a rude question to ask.
And most people in society, are not gonna ask it
but here's what I've noticed is now that we're
at 14,000 subscribers,
we are getting asked questions quite frequently.
And one of the ones that we get asked most often is
about HELOCs or home equity lines of credit.
So today I wanted to jump in and give you
the definitive guide to home equity lines of credit.
And I'm gonna cover everything from what they are
to how you can use them A to Z.
But before we get into it, do me that favor,
hit that subscribe button, hit that notification bell.
Please hit that like button so more people
like you can see this video,
and don't forget about our race to 25,000 subscribers.
When we get there, we're gonna give one lucky subscriber
$5,000 to put towards their RRSP, TFSA
to pay down their mortgage, or if they want
they could even use it to pay down
their home equity line of credit.
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- [Announcer] A definitive guide on how to manage
your credit product and elite price in that order.
It's never been more important
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- Okay, so let's get into it.
Let's discuss home equity lines of credit.
This is legitimately one of the most frequently
asked questions in the comments section.
And finally, I'm going to get around
to making the video on it.
And again, this is the definitive guide.
So there's nothing extra that you don't need.
There is nothing missing.
At least I hope there's nothing missing.
I don't think there will be anything missing
but this is everything you need to know
about how to get a HELOC in Canada.
And let's start with what a HELOC is.
It is a home equity line of credit.
So in other words, it uses the equity in your home
and makes it available to you.
Typically on a revolving line of credit,
I'll get to what that means in a little bit
so that you can borrow that money
and use it how you see fit.
And one of the most commonly misunderstood things
about home equity lines of credit is
yes, it is in fact a mortgage.
So when you go to apply for a mortgage and somebody says
do you have a mortgage on an existing property?
And you have a home equity line of credit
but not what you think is a mortgage,
chances are you do have a mortgage
because home equity lines of credit,
if they are secured against your property
which they all are, are absolutely mortgages.
Anytime you borrow money
and it is secured against your property.
So in other words, you give your property as collateral
for the money that you've borrowed, it is a mortgage.
And a home equity line of credit is no different.
Now, typically they're registered as collateral mortgages
which is a different type of mortgage.
What it means is that it can fluctuate with up and down
as you draw money off of it and pay it back.
Unlike a normal conventional mortgage
where you simply are making payments on a regular basis.
And the principal amount is getting paid down as you go.
Now, home equity lines of credit become available to you
when you have more than 20% equity in your property.
So that is the value of your property,
less the amount of money that you owe
is greater than 20% of the total value.
So for a very simple example of that
let's say you have a $500,000 property
and you owe $400,000 on it,
you don't qualify for a home equity line of credit
because you've only got 20% equity
but the second that you have more
than a hundred thousand dollars in equity available
then you can borrow that money
as a home equity line of credit and depending
on the product and the place that you choose to get it from,
you can get it in different types
of products like readvanceable lines of credit
or just normal second lines of credit,
which again, I'll get to momentarily.
Now, your home equity line of credit in Canada
can be up to 65% of the total value of your property.
Now you're saying, hold on a second, Nolan, you just said
you can only go up to, or once you have 20% equity
you can use that as a line of credit.
Well, yes, what you can do though, is you can have
up to 65% of the value property in line of credit.
And then you can have another 15%
in a normal mortgage for a total borrowing limit
of 80% of the value of your property.
Now, most home equity lines of credit
are interest only payments.
There are some out there, like for example
the Tangerine mortgage or the Tangerine line of credit sorry
is at prime plus 0.1%.
It's priced competitively,
against all the other lines of credit in Canada.
However, it doesn't have an interest only payment.
It has a fixed payment, which is why you're getting
a slightly lower interest rate.
Now the conventional lines of credit that are typically
available at the big banks or companies like MCAP,
they are typically interest only, which means you only pay,
you're only obligated to pay the interest on the amount
that you have actually borrowed.
Typically lines of credit for interest only style
lines of credit are priced
at prime plus 0.5, two prime plus one.
So right now, as of this filming,
home equity lines of credit are, sorry,
as it right now is as of this filming,
prime rate is at 2.45%.
So you're likely going to pay
somewhere between 2.95% and 3.45%.
Now, what is the difference between 0.5% and 1%
as far as the premium on over prime?
Well, that all comes down to how big the line of credit is
and how good of a borrower you are.
Typically the bigger, the line of credit
and the stronger the client,
the lower the interest rate that they will get.
This includes up to doctors and lawyers who will typically
pay even lower rates than this, because they are deemed
to be significantly stronger borrowers
and therefore typically get offered even lower rates
for professional lines of credit.
Now one thing that's important to note
is just like a variable rate,
the rates will adjust with prime.
So as the Bank of Canada moves interest rates up and down,
your home equity line of credit rate will adjust.
Now your premium won't change.
So your prime plus a half
or your prime plus 1% won't change.
However, your overall rate will change as prime adjusts.
So if prime goes up to 2.95%, well guess what?
If your prime plus one, your interest rate is gonna go
from 3.45% to 3.95% accordingly.
Now the key thing here is you only pay
for lines of credit when you're using them.
So in other words, if you have a hundred thousand dollars
in line of credit available to you, but you aren't using it
you haven't drawn any of it down.
Well, you don't pay anything on it
but as soon as you borrow, you start having to pay interest.
So if you have borrowed $50,000 of the a $100,000 dollars
you pay interest on the $50,000 that you borrowed.
And as you pay it down, you pay less interest.
And as you borrow more, you pay more interest.
But the key thing here is you only pay interest
when you are using the funds.
And a lot of people will have a home equity line of credit
but won't necessarily use it.
They'll sit, they'll leave it there,
as a rainy day fund or as a tool
for investments without actually drawing it down.
We recommend that for people who are very, very good
at managing their credit.
And the other thing that we often recommend
that people do is once they've paid
off their mortgage completely,
we often recommend that they put a line of credit
on their property so that their title isn't free and clear
because it has some benefits with respect
to preventing title fraud and having somebody
try to register a mortgage against your property.
Now home equity lines of credit
can be paid down and redrawn.
So if you pay off a home equity line, cut it down to zero
you can always go back and reborrow it.
So sometimes people who are business for self, for example
they will use their home equity lines of credit
in order to, you know, pay them down as fast as they can,
use extra cash that they have on hand
in their business to pay down their debts.
And then reborrow is necessary to try to
minimize their interest costs.
The home equity lines of credit can be combined
with a mortgage, which is often what's called
a re-advanceable line of credit.
So in this scenario, and this is what people use for things
like The Smith Maneuver, which you can go and look
at other videos that we've made on The Smith Maneuver.
What happens is, as you pay down your mortgage
the principal on your mortgage.
So every month your mortgage payment
part of that goes to principal.
As you pay down the principal on your mortgage,
a line of credit becomes available to you
and the limit increases as you pay down
more and more and more of your mortgage.
That's what we use personally
because we run a small business.
Every time we make a payment on our mortgage,
we automatically get that available
to us in a line of credit.
So every month we paid it
down about $2,000 in principal on our mortgage
we get $2,000 available to us in a line of credit.
Now, whether you use that or not is up to you
but this is the tool that people are using when
they do things like The Smith Maneuver
in order to make their mortgages more tax deductible
by paying down the mortgage in advance
borrowing the money back off of the line of credit
and then using that to purchase investments,
thereby making the line of credit tax deductible.
Now, as far as home equity lines of credit go
there is one that we recommend most frequently.
Now I'm probably going to get criticized
in the comment section on this,
because Scotiabank is the only big bank
in the mortgage broker channel that offers
a home equity line of credit.
And people will suggest that I'm saying
that the Scotiabank home equity line of credit
is the best one
because it's the only one that's available
in the broker channel, other than the MCAP product
that is also a very, very good product.
But here's the reality of it.
My mom used to bank,
or used to work for Bank of Montreal for 47 years.
My father worked there.
We have accounts at RBC, we have accounts at TD.
We have accounts
at pretty much every major lender out there.
We have banked at every big bank in the industry
and here's the reality of it
we can go anywhere to get our mortgage.
We understand mortgages, we understand the industry
and we still choose to get
our home equity lines of credit at Scotiabank.
And the reason why is quite simply
that the product offering there,
along with the mortgage offering and the ability
to readvance the line of credit there, as well as
the pre-payment privileges that allow us to go and throw
20% at our mortgage and then have it available to us
on a line of credit, just in case we overspent.
You can go back and watch my video
on our biggest mortgage mistake
that where we paid off too much
for our mortgage and run into a cash issue.
Well, because of the way that Scotiabank mortgage is set up
and the home equity line of credit is set up there
we will never, ever, ever run into that issue.
So I unequivocally believe
that the Scotiabank home equity line of credit
is by far the best in the industry.
Not because that's the one that's available to us to sell
but because it legitimately is, at least in my opinion,
combined with their mortgage and the prepayment privileges
and all the tools that you would need
in order to take full advantage of a HELOC
is without a doubt, the best product in the industry.
Now the question then becomes, what can you use HELOCs for?
What are they good for?
Well, first and foremost, really, really great products
for paying down debt.
Paying down additional credit cards,
paying down non-secured lines of credit
which are typically priced at a higher interest rate.
Just basically paying down anything that is not
at a super low interest rate.
And they're also really great for making investments.
So if you wanna do some leverage investing,
now keep in mind, leverage investing Smith maneuver.
Anytime you buy any sort of investment
with money that is borrowed,
you are inherently increasing the risk of that investment.
Sometimes three to five times the risk
as a result of borrowing the money.
So I don't necessarily recommend leverage investing
but if you want to borrow money in order to invest,
home equity lines of credit
are typically the best way to do that.
And in my opinion, again, the Scotiabank STEP product
just from the virtue of the fact
that you can take a line of credit and switch it
into a variable rate mortgage at a lower interest rate
and just take a portion of a line of credit
and switch it into a normal mortgage
is one of the best features of that product
because then you're basically creating a silo
of that particular amount of money that is clearly
in a hundred percent used for a particular investment
and therefore becomes tax deductible.
Make sure you get your accountant's advice on that.
But that's one of the things that they always
wanna make sure is that the money that you're borrowing
for investments is always separated from the money
that you're borrowing for things that aren't investments.
You can also use home equity lines of credit
to fund businesses as a self-employed person.
And we do that quite frequently sometimes to a fault.
And this is very common in the business world to use
the equity in a house in order to pay off
or in order to inject money into your business.
And then the other big thing you can use them for is
as a down payment for another property.
Whether you're keeping a property as a rental
and moving into another one, and you wanna borrow
the equity out of your existing property
in order to purchase that new property
or whether you wanna purchase rental properties
and you wanna use some of the equity
in your existing property to purchase those new properties
they make a great tool for purchasing more real estate.
Again, that's leverage investing.
So you need to be very careful about it
especially when you were boring money to buy an investment
on your principal residence.
You always wanna make sure
that your principal residence is safe and secure
and that you're not putting it at risk of losing it
but it is a great tool for purchasing additional properties
if that is what you choose to do.
And last but not least
you can always use a line of credit for bridge financing.
So let's say you have a property
that is completely paid off,
and you wanna purchase a new property
but you don't want to sell the one you were living in
prior to taking possession of the new one.
You can use a home equity line of credit
in order to borrow the funds
off of your existing property and purchase the new one.
So really great tool for doing that
and actually a far cheaper tool
than getting something like private bridge financing.
So, you know, home equity lines of credit
are an extremely powerful tool.
I will caution you.
There are some videos out there on the internet
that suggests that you can use a home equity line of credit
to pay your mortgage off significantly faster.
Be very careful with that
because a lot of that is just poor numbers.
And really we have yet to find anybody who has
used that strategy successfully.
If you have used that strategy successfully,
go ahead leave me a comment in the comment section below
or reach out to me via our website.
I would definitely love to hear
what you have to say about that, but our experience is
that when home equity lines of credit are used
in order to try to pay off the mortgage faster,
well, typically people just end up
in more debt rather than less debt.
So if you found this video useful, do me that favor,
hit that subscribe button, hit that notification bell.
Please hit that like button
so more people like you can see this video.
Check the description below for any courses
with respect to how to get a lower interest rate,
first time home buyer courses
and all the other things that go along with that.
If you wanna apply to get a home equity line of credit,
you can also do that description in the links below
and hopefully we'll see you on the very next video.
Cheers.
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