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In today’s market, misconceptions regarding home equity loans cause new homeowners to face issues before or after taking on a loan. Home equity is a great asset when you purposely require money. The loan can have relatively low interest rates and comfortable loan terms for large amounts of home equity. They provide flexibility and benefits not obtainable when borrowing money through other means. 

Before getting into the common myths surrounding home equity loans, it is essential to understand what home equity is and how you can borrow money based on the equity in your home.

What Is Home Equity?

Simply put, home equity is the value of your home that is not encumbered by a mortgage. You can calculate it by the market value of your property minus the debt against it. For example, if you purchased a home worth $500,000 and made a 20% down payment of $100,000, you have equity of $100,000 in your home. 

The mortgage for your home will be the remaining $400,000. Your equity will keep increasing as you keep paying off the mortgage. Furthermore, as the value of your home increases over time, your equity will increase.

Types of Home Equity Loans

There are two main home equity loan types: a lump sum payment and a HELOC or home equity line of credit. 

• Lump sum payment: As the name suggests, it is a one-time lump sum you get from a lender based on the equity in your home. You must pay back the loan over time with a pre-determined interest rate. 

   

• HELOC: This is a line of credit based on the equity in your home, which means you can borrow as much or all of the maximum limit. If you borrow some of the total amount, you can make payments and borrow more. 

Following are some myths related to home equity loans.

Common Home Equity Loan Myths

1. Home equity loans and HELOCs are only for significant expenses.

It is a common misconception among new home buyers. You can only use HELOCs for big spending like high-interest debt consolidation, home renovations, or buying new property. 

You can use home equity loans for costs like medical expenses, starting a business, paying for your child’s education, buying a new car, and more. These types of loans offer better flexibility than other lending products. 

2. Applying for HELOCs or home equity loans is complicated.

A common misconception is applying for home equity loans/HELOCs will be complicated and time-consuming as it involves a lot of paperwork. While that may have been true in the past, there is a more streamlined process with the incorporation of online applications and digital document submissions. 

Furthermore, if you meet the requirements of home equity loans and have a good credit score, you can expedite the process. 

3. Home equity loans are unsecured.

Home equity loans are a secured form of borrowing money, as they are issued based on the equity in your home. Unlike credit cards, your home is the asset that secures your loan. The amount of money you can borrow depends on the equity you have built up in your home, which means the more significant the equity, the larger the loan. 

It also means there can be severe consequences for defaulting on payments, such as the lender foreclosing on your home.

4. Home equity loans significantly affect your credit score.

Financial institutions run a credit check each time you apply for a loan, which slightly chips at your credit score. Applying for multiple loans in a short time triggers several credit checks. It will impact your credit score. 

Applying for a home equity loan will also chip at your credit score, but not significantly. However, you can correct it by making payments on time. Furthermore, making all your payments on time can also improve your credit score. 

5. Home equity loans have high-interest rates.

A home equity loan is a secure loan with a lower interest rate when compared to unsecured loans. Secure loans reduce risks for lenders, while your risk increases. If you default on the payments, they still have a way to obtain their money. 

Additionally, you can repay these loans over a longer duration for easier monthly payments. 

6. You must own your home for years to build equity.

Another common myth with home equity loans is you must own your home for years to build up equity. In actuality, the equity in your home increases over time as the value of your home goes up in the market, and you keep repaying the mortgage. You have equity the moment you purchase it.

If you made a down payment on your home, that amount will be your equity in your home. Since equity is on the rise and fall in the market, during an upswing, you can build significant equity in a short amount of time.

5. Pre-approval is a guarantee.

Pre-approval is an initial estimate of the home equity loan amount, the key being “estimate.” Your lender can still renegotiate or even back out of the deal after a deeper analysis. Pre-approval for a home equity loan is not guaranteed, and you should not treat it as one. 

6. Home equity loans and HELOCs are only for those struggling.

While home equity loans and HELOCs are helpful for those in a financial bind, they can be issued to people with all kinds of backgrounds. Homeowners who are well off and want to invest in new property, make home improvements, or fund education can also opt for HELOCs or home equity loans.

The Bottom Line

With these common myths around home equity loans and HELOCs debunked, you, as a homeowner, can make an informed decision about the money you wish to borrow. Remember, your home and the equity in your home is an asset and can be used to borrow large amounts of money to impact your life. However, defaulting on your payments can have severe consequences, so do your research and be responsible. 

For more information about home equity loans or to start your loan application, call Canadalend at 1-844-586-0713 or contact us here.

There are several reasons to take on a second mortgage on your home. It could be to have an investment property or vacation home, make home improvements, or even consolidate debt. Taking a second mortgage can be challenging because of the rules and regulations involved. It can also be difficult to handle paying two mortgages simultaneously. 

However, if you have decided to take out a second mortgage, there are a few essential elements to remember and common mistakes to avoid. Before getting into the mistakes people typically make when taking out a second mortgage, let’s discuss what exactly a second mortgage is.

What Is a Second Mortgage?

Simply put, a second mortgage requires getting additional financing on top of the pre-existing mortgage for the same property. It means taking out a second loan on your mortgaged house to get finances for various purposes like consolidating debt, having a vacation home or a second home when your children need it, or even making home improvements. 

The finances issued to you are against the equity built up on your first mortgage. Financial institutions issue second mortgages in two forms: a home equity line of credit (HELOC) or a home equity loan.

A HELOC allows you to borrow money up to a specified amount. Most major banks approve a HELOC if the homeowner has good credit with 20% or more equity. On the other hand, a home equity loan is a lump sum given to you that needs repaying over a fixed term. It is a one-time loan which can be ongoing.

Common Mistakes to Avoid When Taking Out a Second Mortgage

1. Not doing proper research.

Before making any decision—especially one as big as a second mortgage—you should research and gather information on your options. This should include the different mortgage providers, the state of the real estate market, the area in which you wish to purchase your second property, property taxes, and more. 

Only after gathering all this information can you make an informed decision.

2. Not taking a realistic look at your finances.

As part of your research, you must look at your finances and ensure you can afford to make two mortgage payments simultaneously. Making two sizable payments can be challenging. Furthermore, there are grave consequences for defaulting, for example, not being able to make payments. 

Review your budget and finances, and speak with a financial advisor to better understand your situation. Discuss the details with the mortgage lender as part of your second mortgage application process.

3. Not having a money management plan.

If taking on a second mortgage is to consolidate debt, you must have a strong money management plan beforehand. Consolidating debt means taking on a bigger loan to pay off smaller debts. It means you must understand how you got into debt and address the root of the problem. 

A second mortgage can become a burden if a strong money management plan is not in place.

4. Not paying attention to your credit score.

Another mistake that people make is neglecting their credit score. Even though you will be taking out your second mortgage based on the equity in your home, you need to pay attention to your credit score as well. 

Your credit history is still a crucial factor when securing a second mortgage. Review your credit report and take steps to improve it before applying for a second mortgage.

5. Not getting pre-approval.

Getting pre-approved for your second mortgage is an important step. It will let you know what kind of mortgage you can get, which will help you determine the investment type you can make. A preliminary evaluation can bring pre-qualification offers. You can find out your estimated interest rate and your maximum principal amount. 

However, your credit score will come into play when getting pre-approval. 

6. Not choosing the right mortgage provider.

If you already have a mortgage provider for your current property, you will likely use the same one for your second mortgage. It is a common occurrence. While not always a mistake, it can be in some cases. 

It is convenient to go to someone you have worked with before. However, in the case of a second mortgage, you should shop around. Don’t be afraid to explore other options or even consider a private mortgage lender if you don’t have one already.

7. Ignoring additional costs during budgeting.

If you want to purchase another property with a second mortgage, you must consider the additional costs involved, like furnishing the home, insurance, maintenance of the second property, and more. These should be accounted for when budgeting for a second mortgage. 

8. Going for the lengthiest term for monthly payments

People often go for the lengthiest term for their monthly mortgage payments because it is a lower amount. However, long-term payments incur more interest over the tenure of the loan, which can be significantly more expensive. 

While this increased cost is often covered with gradually increasing finances, taking on a loan for a shorter duration may cost you relatively less over the long run.

Final Thoughts

There could be various reasons for taking out a second mortgage, so the responsible way to go is to be well-informed, have a money management plan, and choose the right mortgage provider. Our specialists can help you avoid the common mistakes that people make when taking out a second mortgage. 

For more information about second mortgages or to start your application, call Canadalend at 1-844-586-0713 or contact us here.

Buying a new house is challenging. It takes a lot of planning and funds. In most cases, you arrange for the funds for the down payment on the new home through a loan from the bank or a mortgage brokerage, and the loan amount splits into monthly payments with some added interest. After the down payment, families are cash-strapped. The debt makes managing additional expenses, like renovations, repairs, and other bills, difficult. 

This is where a cashback mortgage comes in. Cashback mortgage in Canada allows new homeowners to get a portion of their mortgage back in lump-sum cash when they finalize the mortgage. Before looking at the pros and cons of a cashback mortgage, it is essential to understand what it is and how it works.

What is cashback mortgage?

With a standard mortgage, the bank or a lender provides you with the funds to pay for the house you want to purchase, which is some percentage of the total cost of the property. For example, if you decide to pay 20% down for a house that costs 600,000, your down payment will be 120,000, and the rest is a loan from the bank. 

A cashback mortgage is a mortgage wherein you get some percentage of the loan amount back in a lump-sum payment as a cheque or a bank transfer. For example, for a house that costs 600,000, you can give 20% as a down payment, meaning you will have to pay 120,000, and the remaining 480,000 would be a loan from the bank.

On this loan amount, you can get anywhere between 1% to 7% cash back when you finalize the mortgage, which means when the loan becomes final and distributed funds become available. Therefore, after you receive the loan amount, you will get an additional 4,800 to 33,600 as cashback as a bank transfer or cheque.

With cash back mortgage explained, let’s move on to the pros and cons of this type of mortgage.

Pros Of Cash Back Mortgage

    

1. Any extra liquid funds are always a blessing. A cashback mortgage allows you to have just that. After making the down payment, you may become more conservative with your expenses and even push back some necessary investments into the new home. Yet, with the cashback amount, you can do repairs/renovations, pay some bills, and even furnish the house.
       

2. Help with unplanned expenses. You anticipate expenses and prepare for them as a homeowner. However, accidental expenses could make things more challenging, especially when you have made a significant down payment. These expenses can be for unexpected plumbing repairs, an appliance breakdown, or some unexpected bill that pops up. 


    

3. Cashback mortgages in Canada come with lower interest rates than other forms of loans. It includes auto loans, a credit card, or opening a line of credit. 


    

4. The higher the loan amount, the higher the cashback. Since the cashback depends on the loan amount you require, a sizable loan amount will result in a significant cashback. However, you should understand the terms and conditions of the cashback mortgage before proceeding. In some cases, there is an upper limit to the cashback the lender will offer.

Cons Of Cash Back Mortgage

    

1. Higher mortgage rates. Cashback mortgages in Canada can come with significantly higher mortgage interest rates than standard mortgages. Interest rates apply to the complete loan amount and not just the cash back you receive. It means in the long run, you will end up paying more. In most cases, you pay more over time in interest than the amount you receive upfront.


    

2. You need to qualify for a cashback mortgage in Canada. Typically, the requirements for a cashback mortgage include reliable employment with an hourly rate, which means it is more difficult for self-employed individuals to get approved. 

   
      

   A credit score of at least 650 is also required. Furthermore, getting approved for a cashback mortgage is challenging if the extent of purchasing the home is renting it out. 

   
        

    

3. There are penalties for cashback mortgages in Canada. If you break your cash-back mortgage, you may have to pay back some or all of the cash you received as part of the cashback, which will be in addition to the prepayment penalty. A prepayment penalty is a fee that lenders charge if you pay all or part of your mortgage loan off before the duration you took the initial loan.

Should you get cash back mortgage?

Even though cashback mortgages in Canada have drawbacks, the upfront funds are helpful for most people. They can supplement your income while you recuperate from the heavy down payment. 

The interest rates for cashback mortgages are typically higher. However, the extra amount will only be paid in the long run, giving you sufficient time to grow your finances and not feel the pinch of the additional amount you would have to pay.

Cash Back Mortgage 101: Final Thoughts

There are some pros and cons to cashback mortgages in Canada, and you, as a new homeowner, should take the time to understand all the details before signing the contract. Conduct your research and find the right balance between the best interest rates and the best cashback amount. 

Our experts can help you every step of the way so you make the right decision. So, don't hesitate to contact Canadalend for the best expert advice. For more information about different types of mortgages, call Canadalend at 1-844-586-0713 or contact us here.

The process of buying your first home may be daunting, but it is rewarding as well. Once you have acquired your first home and have returned to a comfortable financial position, investing your money in real estate is a great way to grow your finances. 

One way to do so is to buy a second home and rent it out. Buying a second home in Ontario for renting purposes is not uncommon, and even millennials these days have the potential to purchase a second home while residing in their first home and paying a mortgage. 

There are things to consider before going ahead with this decision. There are some advantages and challenges of renting a second home in Ontario. 

Let’s start with the advantages:

1. Tax advantages

As challenging as it is, being a landlord comes with its perks, and there are some significant economic perks. There are taxes you pay to the government because property expenses like insurance, property taxes, maintenance costs, utility bills, and more are from your rental income. 

You can also deduct losses against your other income, as well as deduct depreciation from your taxes. Furthermore, if you wish to, you can sell the rental property and use that income towards another rental property without paying capital gains tax. 

2. Growth of property value

The value of your property will grow over time. In cities like Toronto, Vancouver, and others, and Ontario in general, the increasing demand for real estate has fuelled property prices. Buying a second home in Ontario for rent will allow you to own real estate that continues to grow in value and become an asset. 

If you decide to sell the rented property, you can turn a significant profit to invest in a bigger property without having to shell out extra from your pocket. 

3. Regular monthly income

Rent becomes another source of income and is something you can depend on every month in addition to your other primary income. Some homeowners invest in multiple houses for rent, which becomes their primary source of income. Buying a second home in Ontario for rent will give you the peace of mind of having a regular monthly income even if your other sources of income stop or face delays. 

For working professionals with a typical 9 to 5 job, a second source of regular income is always welcome.

With the advantages covered, buying a second home in Ontario does come with some challenges. As mentioned, these are challenges instead of disadvantages, so you do not need to worry too much. However, as a landlord and the owner of a second home, there are things you need to keep in mind and deal with regularly.

4. Getting the funds ready

Buying a second home in Ontario, for rent or any other reason, is a costly affair. If you are already paying a mortgage on your first home, you may look elsewhere for the funds, like going to the bank for a loan or asking someone you know. 

Canadalend allows you to take a second mortgage on a previously mortgaged home. A second mortgage gains access to funds for various reasons, including paying off credit card debt, starting a small business, buying a car, or making a down payment for a second home. 

It is also a way to refinance your first mortgage and get more equity against your home, allowing you to get a bigger loan. A second mortgage from Canadalend can help you cover home renovation costs, pay outstanding bills, quickly get cash on hand, stop a power of sale, and more. 

5. Dealing with tenants

Every landlord wishes for decent tenants who respect the property and treat the home as they would their own. Yet, sometimes, a tenant causes issues for the landlord. You must tow the line between setting the rules straight and giving the tenants their freedom. 

It can be challenging as you, the landlord, may have to deal with issues like neighbour complaints, delayed rent, higher maintenance costs, and more. One way to avoid dealing with troublesome tenants is to vet them before signing the contract. Meeting with the potential tenant and understanding their mannerisms is essential as this would dictate your future interactions with them.

6. Complicated taxation

Filing income taxes is more complex with a second home and new avenues of saving on taxes. Not all homeowners know how to minimize income tax payments and maximize deductions. 

You may have to employ a third party to help you save money on income tax but, in turn, have to pay them to do the tax filing for you or give advice on what steps to follow.

7. Staying updated with property regulations

As the landlord and owner of the second home, you will be responsible for keeping the property up to code. It means you must stay updated with the rules and regulations that change in the real estate space. If there are some changes in local regulations, you will be required to be on top of them. 

Your tenant will inform you about any new changes, and it is your responsibility to ensure the house is up to code and you follow the new regulations.

Buying a Second Home to Rent: Final Thoughts

Buying a second home in Ontario to rent is a wonderful investment and an asset. It gives you an extra source of regular income but also acts as an investment that will turn a profit in the future if you decide to sell it. There are some challenges to deal with, but that is a small price to pay for the potential economic gain.  

For more information about buying a second home for rent or a second mortgage, call Canadalend at 1-844-586-0713 or contact us here.