Can I Buy a New House with a Home Equity Line of Credit?
Whether you already own a property and have your eye on another one, or you don’t currently own but are looking to buy a home and want an alternative to a traditional mortgage, it is possible to buy a new house with a home equity line of credit in Canada. The reasons for wanting to do so will vary from buyer to buyer, and buying a home on a home equity line of credit can bring many benefits. However, it can also have some disadvantages and you need to be fully aware of both before you decide to go this route.
In order to qualify for a home equity line of credit, you’ll need to have existing equity in a property; and if you’re going to use the line of credit for buying a new home, it will most likely need to be at least 20% equity in an existing property. If you already own a home and are using a home equity line of credit to buy a new, second property, you may already have this equity in your existing home and can simply borrow against it. If however, you do not currently own a home and want to use a home equity line of credit to pay for the home instead of a traditional mortgage, you’ll need to have at least a 20% down payment for the property. And with a line of credit on buying a new home, that amount is typically non-negotiable.
One of the biggest benefits of buying a new house with a home equity line of credit is that there are no prepayment penalties associated with this type of home loan; and there usually always will be with a traditional mortgage. Not having prepayment fees attached to your loan means that you can make larger payments when you have an influx of cash available, and not be worried about much of that payment being eaten up by fees.
Another benefit to buying a new home with a home equity line of credit is that these loans are a revolving line of credit. Unlike a traditional mortgage, where you receive the full amount and then pay it off gradually until it no longer exists, as you pay down a line of credit, that amount becomes available to you once again. That money can then be used for home renovations, college tuition, emergencies such as a lost job, or investing in stocks, bonds, securities, and mutual funds. Should you choose to use the money from a home equity line of credit for further investing, this can also carry with it tax deductions, which can save you money further on down the road – just another benefit of using a home equity line of credit to buy a new house.
The biggest disadvantage that comes with using a home equity line of credit to buy a new house is that you must have a 20% down payment or 20% existing equity in a home. If you don’t currently own a home and don’t have this much for a down payment, you’ll need to apply for a traditional mortgage, in which you can pay as little as 10%-15% as a down payment.
Bryan J is the author of this article. For more information about home equity line of credit or secured line of credit please visit canadianmortgagesinc.ca.
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