Whether it’s to afford a home renovation, invest in a child’s education or simply pay for unique expenses – like weddings and funerals – a home equity loan or a home equity line of credit are popular borrowing options for Canadian homeowners.

While mortgage debt accounts for 66% of all household debt, only 11% is tied up in home equity lines of credit. The average home equity line of credit balance in Canada is about $65,000.

Yet many Canadians might still not fully understand what a HELOC is or how it is different from a home equity loan. Here, we break down the various home borrowing terms so you can determine which loan is right for you.

What is a home equity line of credit (HELOC)?

According to Nicole Beaton, District Vice-President of Calgary South with TD Bank, a HELOC allows homeowners to use their home’s equity as collateral to fund a number of financial needs.

Using your home as collateral means limits can be higher than other borrowing options and banks can often offer a lower interest rate. The Financial Consumer Agency of Canada (FCAC) describes HELOC’s as revolving credit: people get money, pay it back and borrow it again to a certain maximum credit limit. This is different from a home equity loan.

What is the difference between a HELOC and a home equity loan?

Don’t get these two confused. While they both use your home’s value as collateral, they are essentially two different types of loans.

A home equity loan lets you borrow one lump sum of money, which you must make monthly payments on at a (usually) fixed interest rate over a predetermined length of time. These are common for people who need a large sum of money in a short amount of time.

A home equity line of credit, on the other hand, is similar to a credit card. You only pay interest on what you use and you can draw from it as needed. Interest rates are variable and calculated daily based on the prime rate.

What about a “second mortgage”?

A second mortgage is exactly what the name implies. It can be used to describe any loan that uses home equity as a means to borrow, though it typically refers to a home equity loan (one lump sum cash out) over a home equity line of credit. The first mortgage always takes priority over the second mortgage.

The term “second mortgage” can be confusing since you can technically have a HELOC as a first mortgage – that is if you own a house free and clear and you simply want a line of a credit on it. Most of these loans, however, are second mortgages.

How does a home equity loan work versus a HELOC?

For a home equity loan, you can borrow up to 80% of your home’s total appraised value minus the unpaid balance of the existing mortgage.

It works a bit differently for a HELOC. You can access up to 65% of your home’s market value with a HELOC and “the amount of credit available in the home equity line of credit will go up to that credit limit as you pay down the principal on your mortgage,” according to the FCAC.

Keep in mind, however, your outstanding mortgage + your HELOC cannot equal more than 80% of your home’s total value. Neither loan is a viable option for most new homeowners, who have yet to pay off a large chunk of their mortgage or who began their home buying journey with a down payment of 20% or less.

To determine how much home equity is available to you, multiply your home’s current market value by 80% and then subtract your mortgage. As long as this amount is not more than 65% of the value of your home, you qualify. Divide the HELOC number by your home’s market value to make sure.

Advantages to a HELOC vs. home equity loan

Nicole Wells, Vice-President of home equity finance for RBC, says HELOCs are appealing to homeowners for a multitude of reasons.

“It’s always there for the consumer when they need it,” she says.” They only pay interest on what they use and they can pay it back at any time without a penalty.”

Not only are interest rates on a HELOC lower than that of an unsecured loan but, because repayment is flexible, it can be a great fallback option for borrowing on a rainy day.

“A lot of people are using this option because it gives them the flexibility they need for when life happens. They have the ability to access funds without having to apply for any additional credit,” says Beaton. “And it also gives customers additional flexibility on a payment.”

Other advantages include the freedom to borrow as much as you want (within the maximum limit), access cash easily, consolidate debts (from credit cards or other loans) for a lower overall interest rate and only pay interest on what you borrow.

Disadvantages

As with a home equity loan, you’ll suffer if you can’t repay. Foolhardy homeowners who habitually only pay monthly minimums might end up carrying large amounts of debts for a long time.

Unlike most home equity loans, interest rates are not fixed and can increase at any time with a HELOC. And if you switch your mortgage to another lender, you have to pay off the entirety of your HELOC with your previous bank first.

If you can’t pony up, your credit score will suffer and your home could even be repossessed. The accessibility and flexibility of the HELOC are what could be your downfall, so foresight and careful financial planning are key.

“Like any credit product, you want to make sure you’re borrowing what you can afford, you’re using what you can afford and you have a plan to pay it back,” says Wells.

Which loan is right for you?

You might choose a home equity loan if you need to pay for a one-time event and prefer the security of a fixed-rate loan. A HELOC, meanwhile, is a great option if you need to borrow over a longer period of time and need more flexibility.

Toronto homeowners are reportedly turning to private lenders for mortgage loans, due to increasing interest rates and tougher lending standards implemented by most banks and conservative lenders.

According to Toronto brokerage Realosophy and property data provider Teranet, 20% of refinancing for mortgage deals in the second quarter was facilitated by private lenders. This marked a 67% rise from the first quarter of 2016.

As mentioned earlier, the increased difficulty of applying for mortgages have significantly affected homeowners’ behaviors.

“Purchasing homes and paying off mortgages are getting harder in Canada’s biggest city due to a combination of rising interest rates, higher home prices and tougher standards to qualify for a mortgage. The new rules require borrowers to prove they can make payments at higher rates and apply to new mortgages as well as refinancings or transfers to a new bank,” noted Bloomberg News.

More Torontonians were enticed by private lenders, which are more open to riskier financing arrangements than traditional lenders. While private lenders charge higher interest rates, the share of mortgages financed by them climbed has from a low of 12% in 2016 to 20% in the second quarter this year.

In an email to Bloomberg, President of Realosophy John Pasalis revealed that these lenders are mortgage brokers who have established mortgage investment corporations to earn funds for lending.

For reference, total private mortgage volume rose to $1.5 billion in the second quarter, from $920 million in the first quarter of 2016. Digging deeper, it was noted that nearly half of private lending activity over that period was on detached homes that were refinanced. This was followed by condos, which were also refinanced.

The study found that Generation Xers, or people in their 30s and 40s, were the largest group of consumers preferring private lenders. They cover 42% of all transactions.

Major cannabis producers and sellers are struggling to keep up with the enormous demand for the plant after it was legalized last month.

Canadians’ craving for the herb was such that shortages have become all too apparent in the few short weeks after October 17.

“The response has been pretty unbelievable,” Canopy Growth Corp. CEO Bruce Linton told Bloomberg. “I don’t think everything will run out but you might not be able to get the identical stuff you got last time.”

The most notable supply-side issue is the sheer amount of time that sales licensing takes, which can take as much as a year.

“We’re biting our nails and I think our shareholders are biting their nails too,” according to Anthony Durkacz, director at Ontario-based producer FSD Pharma Inc. “We want to be supplying.”

FSD has acquired its cultivation license back in 2017, but it has yet to receive its sales license.

The Ontario Cannabis Store reported that it has received 100,000 orders in just the first 24 hours of its operation, defying even the most optimistic projections.

Meanwhile, Quebec’s online and in-store orders almost broke through 140,000 in the first week since legalization. Some locations might even get shut down due to the scarcity of supply, the provincial-owned retailer said.

A real estate agent in New Zealand has gained worldwide attention for an unusual listing.

Kelli Milmine of One Agency in Oamaru is handling the listing of a village that has been mostly abandoned since 1989 after its main employer, a dam, was automated.

Lake Waitaki near Canterbury on the South Island includes eight 3-bedroom homes, a restaurant, lodge, 14 hectares of land, and water rights.

It was once home to 40 people and frequented by hundreds more but the loss of jobs and a preference for urban living has made the rural location unpopular.

The state sold the village in the 1990s but the current owner is struggling to find a buyer despite the seemingly bargain price of NZ$2.8 million, or C$2.4 million.

There has been interest from foreign buyers but last week New Zealand banned foreigners from buying homes that New Zealanders could live in themselves, to tackle supply issues.

However, Milimine says that Kiwis don’t want to pay more than NZ$1 million, almost a third of the current asking price.

Pay checks for non-unionized Canadian workers should grow slightly more in 2019 than they did this year.

A new report from the Conference Board of Canada forecasts an average 2.6% year-over-year increase in wages next year, up from 2.4% in 2018.

Those working in the food, beverage, and tobacco products industry should lead the wage increases with a 3% gain, with oil, gas, and technology industry workers not far behind at 2.9%.

However, those in the health sector will see a well-below-average rise in their pay check at just 1.6% year-over-year.

“Over the past few years, we have seen wage increases among the lowest they have been in the past two decades. We are now seeing an improvement and compensation planners are looking to offer increases in 2019 that remain ahead of inflation,” said Allison Cowan, Director, Total Rewards, HR and Labour Relations Research, The Conference Board of Canada.

Provincial gains
Of the provinces, Saskatchewan will lead with an average wage rise of 2.9%, followed by Quebec (2.7%), BC, Alberta, and the Atlantic Provinces (2.6%), Ontario (2.5%), and Manitoba (2.3%).

The Compensation Planning Report 2019 also reveals that the professions in highest demand continue to be IT specialists, skilled trades, management, and engineering. Sales and marketing now round out the top five with the demand for accounting/finance specialists decreasing.

Often blamed for overheating in major markets, flippers actually represented only a minor proportion of home transactions in Toronto and Vancouver, according to a Bloomberg analysis that looked at Teranet Inc.’s land and housing registry.

In Toronto, flipped condos represented just 1.8% of total sales for that housing type as of June 2018. This was significantly below the 4% rate a mere two years ago in April 2016.

Meanwhile, in Vancouver, only 3.4% of condo sales between April and June were those of previously sold homes – a stark contrast with the 5% ratio back in March 2016.

Thus, any federal or provincial-level measures aimed at housing speculation will do little to improve affordability in these markets, the Bloomberg analysis noted.

Flipping “has always been a very rare occurrence” in Toronto, according to RE/MAX Integra regional director (Ontario) Christopher Alexander.

“Most people buy real estate to hang onto it for at least five to seven years,” Alexander said, adding that many short-term sales are due to life-altering factors such as sudden job changes.

Vancouver’s noticeable market slowdown between 2016 and the present has also made condo flipping far less lucrative than it was, realtor Steve Saretsky stated.

“As soon as [prices] stop rising you get into a number of issues,” Saretsky explained in a phone interview. “Are you really going to try to flip it in a down market? There’s no profit to be made.”

Owners of commercial real estate are carrying a disproportionate property tax burden across Canada according to a new report.

The Altus Group’s analysis in association with the Real Property Association of Canada (REALPAC) looks at property tax rates in 11 major urban centres across the country.

The report reveals that in eight of the 11 cities surveyed, commercial tax rates are at least double those of residential tax rates. This indicates that a commercial property would incur property taxes more than twice the amount of an equally valued residential property.

The highest burden is in Vancouver, where the commercial-to-residential tax ratio is in excess of 4:1 despite posting the largest decrease of 9.721%.

The largest increases in 2018 were in Calgary (up 11.950%) and Quebec City (up 7.380%) while Toronto and Montreal join Vancouver with the highest commercial-to-residential ratios in the country of near 4:1.

Quebec City has one of the highest estimated commercial taxes per $1,000 of assessment at $36.09, just below Montreal which remains the highest of all cities surveyed at $37.76.

Multifamily taxes
The report also looks into the property tax ratio on multi-residential properties, comparing the residential property tax rate to the multi-residential property tax rate.

It found that Ontario renters are carrying a disproportionate burden of property tax.

While multi-residential building owners are being taxed equally to homeowners in most of Canada, Ontario cities are showing that apartment buildings built before 1998 carry significantly higher ratios with Ottawa at 1.358 and Toronto leading the pack at 2.069.

The higher levels of taxation on older multi-residential buildings can pose a potential challenge for landlords needing to fund repairs and maintenance, and as a result, are often passed onto tenants through increased rent.

The Bank of Canada’s decision to increase interest rates to 1.75% Wednesday was not a surprise to many, but an omitted word is perhaps more so.

Dr Sherry Cooper, chief economist of Dominion Lending Centres says it was interesting that Governor Stephen Poloz did not continue to say that rates would rise “gradually”.

“Market watchers will certainly note this omission,” she says. “For the first time in years, the Bank has acknowledged it expects to remove monetary stimulus from the economy entirely.”

Dr Cooper says that the policy of the BoC is now to increase interest rates to a ‘neutral stance’ of between 2.5% and 3%. That will require another three rate hikes of 25 basis points over the next year or so.

Household debt is a concern
Although the economy is moving in the right direction, the BoC remains concerned about Canadian oil prices, especially with constrained pipeline capacity.

Then there is the issue of rising household debt.

In the BoC’s Monetary Policy Report is states: “Higher mortgage rates and the changes to mortgage guidelines are affecting the dynamics of housing activity. Housing resales responded quickly to the new mortgage guidelines, and the level of resale activity is expected to continue on a lower trajectory than before the changes. New home construction is shifting toward smaller units, although stronger population growth is estimated to raise fundamental demand for housing.”

Although the level of high loan-to-income ratio mortgages has declined which the BoC says has “reduced household vulnerabilities”, Dr Cooper points out that the bank remains concerned about the “sheer size of the outstanding debt”.

This, she says, is bank double speak for three more rate rises.

Canada’s big banks have all reacted to Wednesday’s BoC decision with increases to their prime lending rates.