How to Use a Home Equity Loan for an Investment Property
Buying a home is one of the best investments out there, especially if you know how to leverage it properly. Owning a house is a gold mine of opportunity. As you’re gradually paying off your mortgage, your house value accrues and can be used as a wealth-building asset.
Home equity refers to how much of your property you own: how much you’ve paid for versus how much mortgage is left to pay off. When you borrow against your home equity, your property becomes collateral, and you’re able to leverage the gained equity to your benefit.
Read on for the complete guide on how to use a home equity loan for an investment property in Ontario.
What is a home equity loan?
Let’s begin with the basics. A home equity loan is typically provided by a financial institution and is secured against the borrower’s existing property. The more mortgage you’re able to pay down, the more equity you build in your home that can be used to take out a home equity loan.
For example, if your home is worth $500,000 and you’ve paid off $200,000, then you have $200,000 built-up equity in your property. You would then be able to refer to a lender in Ontario to bring the total loan-to-value up to 80% (meaning you get offered a home equity loan valued at $100,000).
This is extremely beneficial for all homeowners wishing to invest in a second home, or make home improvements to appreciate the value of the property. How you’re able to harness your home equity loan depends on three main factors:
- How much your current home is valued at.
- How much of your mortgage you’ve paid back already.
- The remaining balance of all mortgages secured by your home.
Types of Home Equity Loans
Home equity loans are typically obtained through banks, financial institutions, lending institutions, and alternative lenders. There two ways they will allow you to borrow using your home as collateral:
Fixed-term equity loan: This sort of loan involves releasing a lump sum to the borrower, with payments amortized over a given time period.
Home equity line of credit (HELOC): This loan is similar to a credit card in that you’re able to withdraw any amount within the credit limit and validity period. A benefit of HELOC is that it can also be used on debt consolidation, in addition to property investment. About 36% of HELOC borrowers aged 25-34 used their loans to pay off other debts, so the loan is certainly flexible for different kinds of use.
Who can you take out a home equity loan with?
While home equity loans are a great way to get started on building your property investment portfolio, some challenges come with obtaining these loans as well. Investors are more likely to default on an investment property as opposed to their primary residence, leading to banks and more traditional institutions becoming slightly more hesitant to give out these loans easily.
In addition, it can be hard to qualify for a home equity loan if large outstanding debts are on the borrower’s profile. This could include current mortgage, credit card debts, or car loans. This is why many borrowers refer to alternative lenders such as trust companies or private mortgage lenders. Some benefits of referring to flexible mortgage specialists are that they often offer to lock in a fixed rate, and have a lower interest rate with fast funding provided as a lump sum.
When making lending decisions, lenders use several criteria to assess the borrower. This includes debt-to-income ratio, credit scores, and available cash. If the debt-to-income ratio of a borrower is on the higher side, then traditional banks and lenders judge the incremental home equity loan to be unfeasible.
Alternative lenders such as Canadalend.com can base lending decisions on home value and outstanding loans. This makes investing in property that much more feasible to a wider range of homeowners.
What are the benefits of a home equity loan?
Taking your home out as collateral has several advantages, such as:
It is cheaper: The main reason this loan is preferred by so many borrowers is that it comes at a cheaper price point with lower interest rates compared to the usual unsecured loans or credit cards.
Fits within financial goals: You’re able to take out this loan without dipping into your savings or attempting to sell any existing investments. Thus, it is financing that does not detract from your long-term savings and wealth creation.
Boosts credit history: Home equity loans in Ontario allow the borrower to improve their credit score. Once the loan is obtained and the borrower begins to make principal and interest repayments, the lender can send reports of the loan to Equifax and TransUnion Canada.
Utilization of all assets: Compared to a personal loan, home equity loans allow you to utilize a portion of your net worth that is typically difficult to access. If the value of your property has grown significantly since you purchased it, then you’re sitting on a sizable principal amount that can be drawn on using a home equity loan.
There you have it: your guide on using home equity loans as an investment property. This loan is a great financing tool for investing in a second property, building up your property investments, or making home improvements. Reach out to Canadalend.com’s team of licensed professionals for more ways to utilize this loan in line with your wealth-building aspirations.