Cash-out refinance vs HELOC: which is cheaper?

As a homeowner in Metro Vancouver, you've likely seen your property value grow over the years. That appreciation, combined with your regular mortgage payments, means you've been building up a significant asset: home equity. It's like a savings account tied to your home, and when managed wisely, it can be a powerful tool for achieving various financial goals. Whether you're looking to renovate, consolidate debt, or make a new investment, unlocking this equity can provide the necessary funds.

The two most common ways Canadians access their home equity are through a cash-out refinance or a Home Equity Line of Credit (HELOC). Both options allow you to tap into the value of your home, but they function very differently and come with distinct costs and benefits. Understanding these differences is crucial to choosing the right path for your financial situation. Let's break down how each works and which might be cheaper for you.

Understanding Cash-Out Refinance

A cash-out refinance involves replacing your existing mortgage with a new, larger mortgage. The difference between your old mortgage balance and the new, higher mortgage amount is then given to you as a lump sum of cash. Essentially, you're taking out a new mortgage for more than you currently owe and cashing out that extra amount.

How it Works

Imagine your home is worth $800,000, and you currently owe $300,000 on your mortgage. With a cash-out refinance, you might refinance for, say, $400,000. Your original $300,000 mortgage is paid off, and you receive $100,000 in cash (minus closing costs). Your new mortgage is now $400,000, and it comes with a new interest rate and terms.

You can typically borrow up to 80% of your home's appraised value with a cash-out refinance. So, if your home is worth $800,000, the maximum new mortgage amount would be $640,000. The amount you can "cash out" would be this maximum minus your current mortgage balance.

Costs and Considerations

• Interest Rates: Cash-out refinances often come with a fixed interest rate, providing predictable monthly payments over the new mortgage term. This can be a significant advantage if you value stability. The interest rate for a cash-out refinance is generally lower than rates for personal loans, credit cards, and often HELOCs.
• Closing Costs: Be aware that cash-out refinances involve closing costs similar to those of your original mortgage. These can range from 2% to 5% of the total loan amount. These costs can sometimes be rolled into the new mortgage, but that means you'll be paying interest on them over the life of the loan.
• Property Transfer Tax (BC Specific): In British Columbia, Property Transfer Tax (PTT) is generally paid when ownership of a property is transferred and registered at the Land Title Office. While a cash-out refinance replaces your mortgage, it typically doesn't trigger PTT unless there's a change in legal ownership. However, it's always wise to consult with a legal professional to confirm your specific situation. The PTT rates in BC are 1% on the first $200,000, 2% on the value between $200,000 and $2,000,000, and 3% on the value greater than $2,000,000. An additional 2% can apply to the residential portion of a property valued over $3,000,000.
• Impact on Amortization: A cash-out refinance essentially restarts your mortgage, potentially extending your amortization period. While this can lower your monthly payments, it can also mean paying more interest over the long run.

Exploring Home Equity Lines of Credit (HELOC)

A HELOC is a revolving line of credit secured by your home's equity. Think of it like a flexible credit card, but with your home as collateral. You're approved for a maximum credit limit, and you can borrow funds as needed, repay them, and borrow again, all within that limit.

How it Works

Using the same example, if your home is worth $800,000 and you owe $300,000, you might be approved for a HELOC up to 65% of your home's value, which would be $520,000. Since you already have a $300,000 mortgage, your available HELOC limit would be $220,000. You only pay interest on the amount you actually use, not the entire approved limit.

Costs and Considerations

• Interest Rates: HELOCs typically have variable interest rates, often based on the lender's prime rate plus a certain percentage. This means your interest payments can fluctuate with market changes. Some lenders may offer fixed-rate options for portions of a HELOC.
• Flexibility: This is where HELOCs shine. You have continuous access to funds, drawing on them only when you need them. This makes them ideal for ongoing projects or unexpected expenses where you're not sure of the total cost upfront.
• Payments: Many HELOCs allow for interest-only payments during the draw period, which can keep monthly costs lower initially. However, it's important to remember that you'll eventually need to pay down the principal.
• Closing Costs: HELOCs generally have lower upfront closing costs compared to a cash-out refinance.
• Secured Loan: Your home acts as collateral for the HELOC. If you can't make your payments, the lender could take possession of your home.
• Maximum Borrowing: In Canada, the maximum borrowing limit for a HELOC is typically 65% of your home's value. This means you must maintain at least 35% equity in your home.

Which is Cheaper: Cash-Out Refinance or HELOC?

There's no single answer to which option is cheaper, as it heavily depends on your individual circumstances and financial goals.

Choose a Cash-Out Refinance if:

• You need a large, one-time lump sum: If you have a specific, significant expense like a major renovation, debt consolidation, or a large investment, a cash-out refinance provides the full amount upfront.
• You prefer predictable payments: The fixed interest rate of a cash-out refinance offers stability and makes budgeting easier.
• Current mortgage rates are lower than your existing rate: If you can secure a lower interest rate on your entire mortgage balance, a cash-out refinance can save you money over the long term.
• You want to simplify your finances: Consolidating multiple debts into one mortgage payment can streamline your financial obligations.

Choose a HELOC if:

• You value flexibility and uncertain expenses: If you need access to funds over time for ongoing projects (like renovations with unknown costs) or as an emergency fund, a HELOC allows you to draw as needed.
• You want to keep your current low mortgage rate: If you locked in a favourable mortgage rate years ago, a HELOC allows you to access equity without disturbing your existing mortgage. This is

Related mortgage resources

• Explore my can I get approved? to get a quick approval-readiness check.
• Explore my refinancing options to compare ways to restructure your mortgage.
• Read Using a Home Equity Line of Credit (HELOC) in Burnaby for Smart Financial Planning for a related BC mortgage perspective.