HELOC On Investment Property: Complete Guide
Are you unable to make your next real estate transaction due to a lack of funds? It is a frustrating condition to be in, especially if you’ve discovered a fantastic property at an amazing price. There are many solutions to helping an investor get the capital needed to move forward on a property.
A HELOC (home equity line of credit) might be the ideal solution. It is a terrific option for real estate investors to get the funds they need to invest in real estate by borrowing against a valuable asset they already own: their home.
So, before you continue, if you want to learn more about HELOC pros and cons, interest rates and more, click the link below to book a free strategy call with our team at LendCity today.
How to Access a Home Equity Line of Credit (HELOC)
Utilizing the equity in your home or rental property via a Home Equity Line of Credit (HELOC) can unlock a wealth of possibilities. This strategic financial tool allows you to leverage the equity in your property - to consolidate debt, handle home renovations, or even provide the much-needed capital for an investment property. Unlike a traditional home equity loan, a HELOC offers flexibility in terms of how you use this monetary reservoir linked to your property's equity.
To secure a HELOC you must own a a home or investment property that the line of credit can be secured against. Instead of providing you with a lump sum, like a mortgage, lenders will grant you access to a maximum borrowing amount. This borrowing amount is revolving, like a credit card. You can use as little as you need or the full amount. Note: Lines of Credit in Canada do have a maximum loan to value of 65%, unless you bundle them with a mortgage, in which you can get up to 80% of the equity in your home.
4 Benefits Of Using A HELOC For An Investment Property
Here is why you should choose a HELOC over a mortgage.
Accessibility to Funds
A HELOC operates similarly to a credit card. It's a revolving line of credit that allows you to draw funds when needed and repay them at your convenience. This makes a HELOC a flexible option for investors who require money at different stages of the property investment process.
Lower Interest Rates
A HELOC typically offers lower interest rates than other credit options like credit cards and personal loans since the loan is secured against your home. This means less interest spending and more towards achieving your investment goals. However, you should note that a Home Equity Line of Credit will have higher rates than a Mortgage.
Tax Benefits
Interest payments on a HELOC are often tax-deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. These tax benefits can further decrease the cost of borrowing. Always speak to a professional accountant to confirm your tax benefits.
Equity Utilization
Unlike traditional loans, a HELOC allows you to leverage the equity you've built up in your primary residence. This way, you can use the value you've accrued in your home to facilitate your property investment endeavours.
Consider the following table for an overview:
Advantage | Description |
Accessibility to Funds | Flexible, on-demand access to funds, compared to lump-sum loans. |
Lower Interest Rates | Reduced borrowing costs due to lower interest rates than most credit options. |
Tax Benefits | Potential for tax deductibility on interest payments. |
Equity Utilization | Leverage the accumulated value in your home to fund property investments. |
"Smart real estate investors choose a HELOC because of its flexibility, lower interest rates, potential tax benefits, and the ability to utilize home equity. In a property investment scenario, these factors could translate into significant cost savings."
Leveraging a HELOC for your property investment could prove beneficial by providing flexible access to funds, lower borrowing costs, and potential tax benefits. However, like all financial decisions, it's crucial to evaluate your financial situation and consult a professional before diving in.
Also, if you have a mortgage on the property and get a readvancable mortgage, then as you pay down your mortgage you can have access to more and more funds from the line of credit with every mortgage payment.
2nd Mortgage vs. HELOC: What’s the Difference?
Second mortgages often carry a higher interest rate than the initial mortgage. A second mortgages is a one-time funded loan that obligates you to meet the repayment deadlines as per the predefined schedule. This means you must take all the funds at once and start paying interest on them.
In contrast, HELOCs are flexible spending accounts with adjustable interest rates that you can tap into whenever needed. Varying interest rates implies that the sum you owe on your HELOC payments can alter from month to month, keeping in tandem with the Bank of Canada set rates.
Maintain the Model
Looking for a way to start investing in real estate with your existing assets?You can utilize a HELOC to lend against the equity you’ve constructed in an investment rental property, for example, and acquire another rental asset.
HELOCs are a terrific way for experienced investors to swiftly expand their property portfolio without dipping into their financial reserves.
Sometimes a HELOC may not be the best strategy for an investor. Give us a call for a free Strategy session to go over your options.
The Advantages of Using a Home Equity Line of Credit
Here are the most important advantage of this investing vehicle:
Improves credit
One of the main advantages of utilizing a home equity line of credit is that it appears on your credit report as a line of credit, just like a credit card. This means that if you utilize less than 30% of the cash available on your HELOC, your credit score will improve. Additionally, your overall credit score will rise if you complete your payments on time and schedule.
Enhances liquidity
You may wish to raise your cash on hand for various reasons, ranging from covering unexpected bills to purchasing an investment property entirely. Whatever your motivation, you can use a home equity line of credit to access equity that is tied up in your home.
HELOCs can be used for both the down payment and renovation costs of an investment property.
Disadvantages to using a HELOC for investment property purchases?
Here are the main disadvantages of this investing strategy.
Fluctuating Interest Rates
One significant drawback of using a HELOC is its variable interest rates. Unlike fixed-rate loans, the interest rate of a HELOC typically adjusts depending on the financial market conditions. This can potentially lead to unpredictable payment amounts, affecting the investment's stability.
Increased Debt
HELOCs contribute to an increased debt level. Over leveraging your investments increases your risk exposure, especially in a declining housing market. More clients of ours that have lines of credits, tend to use them, raising their debt levels. Be sure to budget accordingly.
Property Risks
In the event of non-payment or default, the lender could potentially take ownership of your property. As a HELOC utilizes your home as collateral, this can put your property at unprecedented risk. If you are late on your mortgage or line of credit that is secured to the home, the lender does reserve the right to freeze your line of credit, which can tighten things for you financially.
Risk-minimizing Tactics
In order to mitigate these potential drawbacks, consider the following strategies:
Financial Buffer
Always maintain a significant slush fund. This will provide a safety net in case your investment doesn’t pan out as anticipated or if other unexpected expenses emerge.
Financial Planning
Effective financial planning is critical. Ensure you have a robust payback plan in place before utilizing a HELOC.
Risk Analysis
Analyze your risk tolerance. Your capacity to manage and absorb potential losses is critical in determining whether a HELOC represents a suitable investment strategy for you.
Interest Rates For HELOC On Investment Property
If you're considering using a Home Equity Line of Credit (HELOC) to finance your investment property purchase, it's vital to understand the standard interest rates and terms involved. In this case, you will receive an interest rate that revolves around the Prime Rate, specifically, Prime Plus 0.5%.
Note: The Prime Rate is a benchmark interest rate used by the lenders to set rates on various types of loans, including a HELOC. It is, however, subject to fluctuation, making it imperative to keep an eye on the economic trends.
Interest Rates for HELOC - A Closer Look
The cost of a HELOC is typically pegged to the Prime Rate plus a certain percentage, in this context, plus 0.5%. Here's an illustrative breakdown:
Current Prime Rate | + 0.5% | Resulting HELOC Rate |
7.25% | + 0.5% | 7.75% |
Current Prime Rates as of April 19th, 2024.
With these specifics, you need to maintain a keen eye on the Prime Rate trends. For instance, if the Prime Rate decreases, your HELOC rate might also decrease, bringing down the cost of borrowing. Conversely, if the Prime Rate increases, so do your expenses.
How to Qualify for a Home Equity Line of Credit
When contemplating using a home equity line of credit (HELOC) to fund your investment property purchases, the primary question to consider is whether you meet the qualifications for one and if it aligns with your investment strategies. As a homeowner with significant equity in your home, you are likely to be a strong candidate for a HELOC. Here are some factors that may determine your eligibility:
Credit score
Like any other credit line, your credit score is essential in determining whether you qualify for a home equity line of credit. HELOCs are less risky for lenders than unsecured lines of credit, such as credit cards, because you are lending against your home’s equity.
Debt-to-income ratio
Your debt-to-income ratio, which is factored into your credit score, could determine whether you qualify for a home equity line of credit or not. Banks are hesitant to provide you with another loan if you can’t afford to pay off what you currently owe. The majority of banks set a maximum debt-to-income ratio of roughly 44%. Alternative lenders can go to 65% TDS and possibly even higher depending on your unique scenario.
Equity in your home
The equity amount you have in your home will affect whether or not you qualify for a home equity line of credit and the amount you can request. When the mortgage balance is less than the home’s worth, the house has equity. You won’t qualify if you’ve previously taken out a second mortgage or a home equity line of credit.
Also note lines of credit can only access up to 65% of the equity in your home, unless you bundle the product with a mortgage, then you can access 80% of the equity.
Do not be discouraged if you cannot qualify for a home equity line of credit. There are various financing options that prospective real estate investors might use to get into the market. You can always locate an investment opportunity that matches your needs if you are a motivated and intelligent business owner.
HELOC Financing Caveats
Not all lenders offer home equity lines of credit or are investor-friendly. We recommend you contact us at LendCity Mortgages for your investor financing needs. You can reach us using the link above or by calling 519-960-0360 or clicking the link below to book a free strategy call today.
Here is the link to your HELOC Strategy Call