HELOC - how much can I tap after putting down 20%

[alanbrenton]

If I were to put a 20% downpayment on a residential property to avoid paying mortgage insurance, will I be able to tap a certain percentage of that home equity for other foreseeable household expenses?

Or will I always need to have at least 20% equity to avoid paying mortgage insurance down the road?

I remember when my dad had half the mortgage paid, we were able to tap into the paid portion for other expenditures. This was with Canada Trust back then.

[Thalo]

If you put the minimum 20% down then you will have no equity available in your house for a HELOC. Yes, you do need to own at least 20% of your house. As you pay your mortgage back and/or the house value increases equity is freed up for a HELOC.

ie: let's say a few years from now your house is worth $300K and your mortgage is down to $150K. Amount available for a HELOC is:

$300K x 0.8 = $240K
$240K - $150K mortgage = $90K

[temporalillusion]

No, If you take any equity out you'll have to pay mortgage insurance since you're going over 80%.

And most heloc's require 20% down minimum as well.

One product that might be of interest is these "matrix mortgage" things, where it's a traditional mortgage but as you pay down the principal that becomes an accessible line of credit.

Unless you buy something at significantly below market value or values are increasing rapidly typically you have to hold a property for a while before taking equity out of it makes any sense.

Is the only reason you want to use a heloc is to pull money out of the equity?

When you say "other expenses", what kind of stuff? I think it's a bad idea to buy stuff with equity from your home unless it's something that appreciates (investments of some kind). Unless you are thinking of paying off your heloc in a few short years.

Take a car for example, if you buy a $40,000 car with a 5 year loan at prime, you'll end up paying an extra $6600 in interest for that car. Buy that same car with a heloc and take 25 years to pay it off, and you'll pay almost $40,000 in interest for your car, almost doubling the cost of the car!

[temporalillusion]

If you put the minimum 20% down then you will have no equity available in your house for a HELOC. Yes, you do need to own at least 20% of your house. As you pay your mortgage back and/or the house value increases equity is freed up for a HELOC.

ie: let's say a few years from now your house is worth $300K and your mortgage is down to $150K. Amount available for a HELOC is:

$300K x 0.8 = $240K
$240K - $150K mortgage = $90K

One other step in this situation. The limit on the heloc doesn't increase automatically as your house value increases; you have to get an appraisal and re-qualify with the lender to get it increased.

[hoob]

One other step in this situation. The limit on the heloc doesn't increase automatically as your house value increases; you have to get an appraisal and re-qualify with the lender to get it increased.

Depends on the HELOC product. Mine is a floating limit that increases as the mortgage is paid down, with no re-appraisal.

[temporalillusion]

Depends on the HELOC product. Mine is a floating limit that increases as the mortgage is paid down, with no re-appraisal.

Yeah, that's the matrix mortgage product I was talking about.

The line of credit limit increases as you pay down the principal, but the total of your line of credit limit and outstanding principal together never exceed the initial principal amount (80% or 75% of the property value when you first purchased).

If you want to access the new equity that's a result of property value increase, you have to either extend your line of credit or add a second financing.

[grant]

Depends on the bank.

@ HSBC I put 25% down (this was a few years ago) on a $117k property, and was given a $10,000 LOC... which calculates out to 8.5% withdrawl.

The minimum downpayment / equity is only a requirement for mortgages. Nothing stops the bank from giving you another credit facility also secured by your property.

[oeketer]

for example, if your home is worth 100k, and you put 20% down, you have a mtg for 80k. You can get a LOC secured by your property, but you would have to pay the insurance premium for the HELOC because the total lien amount against your property would be higher than 80%

[grant]

but you would have to pay the insurance premium for the HELOC because the total lien amount against your property would be higher than 80%
NOT NECESSARILY. The amount registered on title can be for any amount and doesn't have to relate to the actual amount borrowed, and it doesn't force mortgage insurance.

e.g. with HSBC my mortgage was registered for the full purchase price even though the mortgage was 75% and my LOC was 8.5%. This allows the bank freedom with increase your lending facility when prices rise without re-registering on title.

[temporalillusion]

The minimum downpayment / equity is only a requirement for mortgages. Nothing stops the bank from giving you another credit facility also secured by your property.

I was going to ask if you are positive, but your example proves it. I remember asking about that to a mortgage broker way back when heloc's were still fairly new, and they said even though it's not a traditional mortgage, since it's still lending for the purposes of purchasing real estate they fell under the same rules with regards to insurance; higher than 80% (then 75%) had to be insured.

That's very very interesting, that would allow for some additional flexibility for sure.