New to real estate and just trying to learn as much as possible. So, I will just jump right in. Can some help clarify and maybe go into detail about the process of getting approved for HELOC/LOC in Canada, specifically in my expensive market of Vancouver, British Columbia? The approval process, what it entails, and when it would make more sense to get a HELOC rather than a refinance?
Also :) If someone doesn't mind running some small examples of LTV% on a refi, say if my property was worth 1Million.
AND finally, what does a 'revolving HELOC/LOC tied to the mortgage" mean?
Rental Property Investor · Edmonton, Alberta · Member since 2015 · 307 posts · 200 votes
5y
Hi @Tomislav Glamuzina Getting a HELOC is a great place to start. It's the first thing we did when we starting learning about real estate, so we could access the equity in our home.
Sounds like you have a mortgage already? In order to get a Home Equity Line of Credit (HELOC) you will need to get a new mortgage product that has a HELOC component (unless your current one was set up with the ability to do that already, but likely it wasn't). To do that, you need to go through a refinance, so the process is the same as getting approved for a new mortgage.
I would refinance to get a HELOC, rather than refinance and pull out money in cash (notice that both these options involve a refinance). The main reason is that as you pay down the mortgage, that equity can be added to the HELOC and can be accessible. Otherwise, you would have to refinance again to access it. That is what is called a revolving HELOC or a re-advanceable HELOC.
ex. $1M property value, with a $500k mortgage remaining. You can typically refinance up to 20% LTV, so that's $800k. 800-500=300 is accessible. You get a new mortgage product that has a $500k mortgage component and a $300k HELOC packaged together.
By the way, a plain LOC is not secured by a property and not related to your mortgage. Typically the amount you can get is lower and has higher interest rate.
All that said, I'm not a mortgage broker, just someone who's gone through the process a couple times. I highly recommend talking on the phone with a mortgage broker, and ideally one who understands the Smith Maneuver. Wouldn't hurt to read the book on the Smith Maneuver yourself - I wish I knew that from the beginning.
Investor · Port Coquitlam, BC · Member since 2013 · 203 posts · 119 votes
5y
Hi @Tomislav Glamuzina and glad you're looking at getting educated on financing options. @Zorya Belanger has covered it but just to add to her good info, I'll share my story. We have a few out-of-province rentals and fund some flips.
We refinanced this year with RBC and it was painless. We were very fortunate because we had just paid off our mortgage a few months earlier so we were mortgage-free. With our new financing, the LOC part was up to 65% LTV but since we wanted to get the maximum cash, we took an additional mortgage for 15% LTV which gave us a total of 80% LTV. The mortgage is principal and interest with a 25 year amortization. However, what I love is that the LOC part is interest-only, which we have used to fund flips at 12%. We have borrowed at 3% but make 12% so using the banks money, we net 9% after all expenses. It's an infinite return because we are using none of our own money.
If you want more info, always glad to get on a zoom call and discuss the details, or go for a coffee after this "COVID-thing" is over. Good luck on your REI journey.
Thank you for the great advice. I did not know that when you get your mortgage you have the option of having it attached. That is also very interesting about the mortgage payments being added to the HELOC and having it accessible at any time… very cool. So, would it make sense to get a HELOC with every mortgage you get haha? Is it possible to get a HELOC right from the start of a new mortgage? I just briefly looking up the Smith Maneuver, a fascinating concept, any downfalls?
What is the different way of thinking regarding your second comment if it were a rental it would make more sense to refinance?
Congratulations on paying off your mortgage, must be exciting. THAT is brilliant. I love hearing stuff like that, makes me all warm and fuzzy about all the possible options LOL. So, essentially, you have a somewhat big pit of money you can always dip into at 3% to fund say renovations, purchases, down payments, etc? So, if you haven't paid off your mortgage how would this situation differ? Would you not be able to get as high of a HELOC/LOC?
Yeah, we can definitely set up a zoom call. I can write down a few questions that are of interest.
For Smith Maneuver, I'd recommend reading the book. It's not the easiest thing to explain. Yes, it might make sense to get HELOCs from the beginning on all buy and hold rental property mortgages. With a rental property, you can right off the interest expense. On your personal residence, you can't right of the interest. BUT, if overtime you slowly turn the mortgage into a HELOC and use the HELOC to invest, you can write off that interest. That's the main concept of Smith Maneuver, and why it makes the most sense to have it on your personal residence. Not a bad idea for rentals, as then its a way to access equity in the future without having to refinance or sell.