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If you take out a HELOC (home equity line of credit,) you’re going to need to know what rate you’re paying on the loan, and how that will affect your payments. Many times homeowners consider getting a HELOC knowing that only the interest will be due every month. Yet they don’t know what interest rate they’ll have, or how that rate will be determined. And to get the best deal on any HELOC, you must fully understand both of these things.

All HELOCs in Canada come with a variable rate interest; this is one of the things that sets them apart from home equity loans. This variable rate changes every day and largely depends on what the Bank of Canada’s prime rate is. Lenders will add a certain percentage to this and that total will be the variable rate on your HELOC. So if the prime rate is sitting at 1%, lenders may quote you a HELOC rate of “prime plus 3%.” When shopping around to different lenders trying to find the best deal, you’re looking for that “plus percentage” to be as low as possible.

From the lenders’ perspective, HELOCs can be dangerous in times when home values are decreasing because there is less equity to draw from. Lenders don’t want to make loans that are going to be defaulted on, and homeowners don’t want to get in a debt situation that they can’t handle. Because of this, in times when housing markets are on a downturn, and seeing a reduction in prices, general interest rates on HELOCs will generally rise.

Some homeowners consider getting a HELOC in order to consolidate debt and help improve their bad credit. They often also wonder if their bad credit will affect the interest rate they receive on their HELOC. Because these types of loans are mostly based on the amount of equity a homeowner has, credit rating doesn’t play as major a role in obtaining a HELOC as it did when applying for the original mortgage.

However, often HELOCs are also a second mortgage on the property, and so is second in line to the original mortgage should you default on the loan. That makes it riskier for lenders and if you have bad credit, it makes it even riskier. Because of that, having a bad credit score might affect the interest rate on your HELOC; but it shouldn’t prevent you from being able to get one.

Many homeowners, whether before or after obtaining their HELOC, often wonder whether or not their rate will change. The very fact that it’s a variable rate will mean that it’s going to change; you’ll need to check with your lender or your mortgage broker to see if it’s going to change monthly, annually, bi-annually, or under any other terms. Another time when your HELOC rate might change is at the end of the draw period, when the loan moves into the repayment period. Often these are refinanced as home equity loans, which are offered with a fixed rate.