6 Tips for Using HELOC to Pay off Mortgage Faster

  • Palak
  • September 23, 2022

In 2020, banks issued deferrals to almost 800,000 Canadian mortgages. Once payments resumed, Canadian homeowners decided they no longer wanted to worry about mortgage payments and looked for ways to eliminate the debt.

Loans are common options for paying off a mortgage, but can you use a HELOC to pay your home’s mortgage quicker? The answer is yes!

However, there are a few things to know before applying for a HELOC. Keep reading to learn six tips for using a HELOC to pay a mortgage faster.

1. Understand What a HELOC Is

The first tip for using HELOC to pay a mortgage faster is understanding exactly what a HELOC is. HELOC is an acronym for ‘home equity line of credit’ that homeowners can secure through home equity.

So, how does a HELOC work to pay off a mortgage?

HELOC is a revolving credit line that can be used to consolidate debt. You’ll borrow against the available equity in your home and put your home up for collateral.

When you repay your outstanding balance, the available amount of credit gets replenished like a credit card. You’ll be able to borrow again if needed.

You can borrow as little or as much as needed during the draw period up to the established credit limit. Typically, the draw period is around ten years.

2. Find Out if You Qualify

Using a HELOC to pay off your mortgage faster only works if you have equity in your home. It means that the amount you owe on your house has to be less than the home’s value.

In general, you’ll be able to borrow up to 80% of the value of your home, not including the amount you currently owe.

A lender likely won’t ask what you are using the HELOC for, but they will look at your credit score and history. Similar to when you received your mortgage, a lender will check the following:

  •  Employment history
  • Monthly income
  • Monthly debts

To qualify for a standalone HELOC as a substitute for a traditional mortgage, you’ll need a minimum down payment or equity of 35%.

A HELOC combined with your mortgage, or a re-advanceable mortgage, combines a fixed-term mortgage with a revolving line of credit. You can refinance part of your home purchase this way as well.

With the information lenders find, they will decide if you qualify for a home equity line of credit.

3. Consider the Interest Rate

When using a line of credit to pay off a mortgage faster, you might have a say in your interest rate. HELOCs are a popular option because they have lower interest rates than credit cards and personal loans.

A variable interest rate can change each month as calculated from an index and a margin. The index is used by banks to set rates and can move up or down. Margin is a constant throughout the line of credit and is added to the index.

Most HELOCs are variable rate interest loans so ask about the current interest rate and the maximum possible rate you pay when interest rates inevitably go up.

If you have a variable interest rate, your principal and interest payments might change based on interest rate fluctuations and your balance.

Fixed interest rate payments are more predictable but not typical for HELOCs. Some lenders will give you a choice.

4. Shop Around

Instead of using a home equity loan to pay off a mortgage early, use a line of credit to get a lower interest rate. Homeowners often make the mistake of not shopping around for the best interest rate.

There will be some lenders who still have high-interest rates on a HELOC. If you want to take advantage of paying your mortgage off with as little extra debt as possible, shop around.

Get a quote from a few different lenders in your area and use them to negotiate a fair rate. Across Canada, you’ll find varying interest rates, prices, terms, and accessibility. Take your time to find the best deal.

 5. Understand the Risks Involved

Anytime you borrow money, there are risks involved. When it comes to HELOCs, the risk is that a lender could foreclose on your home if you cannot make payments.

With a variable-rate HELOC, your monthly payment and interest rates will rise. The amount you pay could be much higher years later when you have to start paying the principal.

You can minimize this increase by paying off the principal before the rate resets. The more equity in your home, the more protected you are when the market fluctuates.

Don’t only consider what will help you pay off your mortgage today. Consider how it will affect your budgeting and payments down the line as well.

6. Know the Difference Between HELOC and a Home Equity Loan

The last thing you should know about paying off your mortgage faster with a HELOC is that it is not the same as a home equity loan.

Many confuse the two because they are both secured by home equity. While a HELOC is a revolving line of credit that allows you to tap into your home’s equity as needed, home equity loans provide a lump sum upfront.

Homeowners must make fixed payments over the life of a home equity loan. The loans come with fixed payments and fixed interest rates for the loan terms.

HELOCs often have a variable interest rate, and the payments aren’t usually fixed either. You’ll have a credit line available for emergencies that you won’t get when you opt for a home equity loan.

Using a HELOC to Pay a Mortgage Faster: Is It a Good Idea?

Using a HELOC to pay a mortgage faster is a common use of this line of credit. Deciding if it is a good idea depends on situational factors.

Can you afford payments now? How will it affect your debt down the road?

Answering these questions and using this guide will provide you with the knowledge needed to use a HELOC to your advantage.

Don’t wait any longer to make high-interest mortgage payments. Apply for a home equity line of credit in Canada now!

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