HELOC

Explanation Note: Home Equity Line of Credit (HELOC)

Nowadays, many homebuyers obtain financing through a Home Equity Line of Credit (HELOC) rather than a conventional mortgage alone. A HELOC is secured against real property and typically consists of two components: a revolving line of credit and a mortgage component, which may be used to borrow funds on a revolving or amortizing basis, depending on the terms of the lending arrangement.

In a real estate transaction, the legal procedures for a HELOC may differ from those for a conventional mortgage. On the sale of a property, the seller’s lawyer will generally arrange for the repayment of the outstanding balance secured against the property and obtain a discharge of the existing charge from the seller’s lender. The discharge releases the property from the existing security. The seller’s lender may then restore the available credit under the seller’s HELOC, subject to the terms of the credit agreement and the lender’s procedures.

On the purchase of a property, the buyer’s lawyer will arrange for the registration of the buyer’s new mortgage or other applicable security against the title to the property, in accordance with the lender’s instructions. Where the buyer’s financing is secured by a HELOC, the buyer’s lawyer must ensure that the appropriate charge is registered in the required priority, typically as a first-ranking mortgage, subject to any permitted prior encumbrances.

Example

Buyer A purchases a property in Toronto using financing secured by a HELOC. On closing, A’s lawyer arranges for the registration of the new mortgage charge against the property in accordance with the lender’s instructions. At the same time, Seller B’s lawyer arranges for the payout of the outstanding amount secured by B’s existing mortgage or HELOC. Once the required obligations have been satisfied, B’s lender will arrange for the discharge of its existing charge, releasing the property from that security. Subject to the terms of B’s credit agreement and the lender’s procedures, the available credit under B’s HELOC may then be restored.

It is important to distinguish between discharging the existing charge from title and restoring the available credit under the seller’s HELOC. These are separate matters governed by the lender’s security arrangements, credit agreement and procedures.