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The COVID-19 driven economic downturn has been hard on Canadians: unemployment rates have risen to record highs, with 44% of people across the country losing income due to the pandemic, and over  2.8 million enrolled for CRA benefits.

With loan and credit deferrals soaring, it’s clear that Canadians are more cash strapped than ever before.

If you’re a homeowner seeking extra or emergency cash, home equity financing allows you to access a line of credit or a lump sum deposit, at far lower interest rates than those available on personal loans or credit cards.

What is home equity?

Home equity refers to the total amount of your wealth tied up in your home, and is calculated by subtracting the outstanding amount owed on your mortgage from the current value of your home. For example, if your home is worth $350,000 and you owe $200,000 on your mortgage, you have $150,000 in home equity.

The longer you’ve owned your home, the more home equity you’re likely to have: home equity typically increases as you pay off your mortgage, and as the value of your home appreciates over time.

Most homeowners who make regular mortgage payments have a significant amount of home equity built up, particularly as values of homes across Canada have skyrocketed in the last decade.

The loan amount available to you will depend on the amount of equity you have accumulated in your home, and which home equity financing option you choose.

1) Home Equity (Second Mortgage)

As the name implies, a home equity loan is a loan secured against your home - essentially a second mortgage. Second mortgages allow Canadian homeowners to borrow up to 80% of their appraised home values, minus the balance on their first mortgage.

With a second mortgage, you’ll receive your loan as a one-time lump sum deposit.

As implied by the term second mortgage, you will now have two mortgages, both of which you will need to repay in fixed monthly installments. As home equity loans have fixed interest rates, your repayment amount for this second mortgage will be the same each month.

Whilst interest rates on home equity loans are usually higher than on first mortgages, these second mortgages still offer far better rates than either personal loans or credit cards.

Second mortgage rates are, however, higher than those on first mortgages. In the case of default, your first mortgage would be paid off first, which makes second mortgages an inherently riskier product for lenders.

2) Home equity line of credit (HELOC)

A HELOC is a line of credit backed by your home equity, which works pretty much like a credit card - but with far lower interest rates. You'll have access to a line of credit, from which you’ll be able to withdraw instant cash, up to a certain credit limit.

This line of credit will be available to you for a fixed time frame, typically around 10 years. At the end of this “draw period’, you must begin repaying the borrowed amount over the term of, usually the next 10 to 20 years.

Interest rates on a HELOC are variable, which means that they will fluctuate over the repayment period.

3) Cash-out refinance

Mortgage refinancing - also known as remortgaging - involves replacing your existing mortgage with a new mortgage, typically one with more favourable terms, such as lower monthly payments or lower interest rates.

In a cash-out refinancing, or home equity refinancing, homeowners refinance their mortgage for a greater amount than the amount owed on their existing mortgage and take out the difference in cash.

To qualify for a cash-out refinancing in Canada, you’ll need at least 20% equity in your home. You’ll be able to borrow up to 80% of the appraised value of your home, minus the balance on your mortgage or any other loans secured against your home, including any credit owed on a HELOC.

As interest rates on the refinanced part of your mortgage are calculated separately from interest rates on your original mortgage, cash-out refinancing is a particularly valuable option in the current low-interest environment.

4) Reverse Mortgage

For Canadians aged 55 and above, a reverse mortgage is a home-equity option that allows homeowners access up to 55% of their home’s value in credit. Funds can be advanced either as a lump sum payment, in pre-determined monthly installments, or as a line of credit.

Unlike other mortgage products, a reverse mortgage requires no repayment of the loan until the homeowner sells or no longer lives in the property. The proceeds from the home’s sale will go to the lender, repaying the principal, interest, insurance, and fees.

Any proceeds from the sale that exceed the loan amount will go to the homeowner or their estate, who will also have the option to pay off the mortgage and keep the home.

Interest rates on reverse mortgages may be fixed or variable, and are typically higher than those on a first mortgage, but significantly lower than interest rates on second mortgages.

Why choose a home equity financing option?

If you’re a Canadian homeowner seeking extra or emergency cash-on-hand, it’s important to keep in mind that credit cards and personal or payday loans are not your only option.

You’ll likely get far better interest rates - and equally fast and flexible financing - by choosing to leverage your home equity instead.

If you’re interested in home equity financing, feel free to give us a call or book a free consultation. At Canadalend, our mortgage experts are always glad to answer any questions or guide you through the process.

When your mortgage’s repayment terms are no longer suitable for you, it may be time to refinance. Fortunately, if you’ve been waiting for the right moment to do it, the moment has come. As of October 2020, mortgage rates are incredibly low. To the shock of many, this drop has been continuing for months. Rates may drop even further, or at least remain this low into 2021.

Good News For Homeowners & Homebuyers

As a reaction to the economic damage of the COVID-19 pandemic, the Government of Canada has focused on lowering interest rates to encourage spending. National interest rates have been lowered, and negative interest rates are seen as a possibility.

The goal of the government response is to encourage spending amid a time of economic challenges. For homeowners that are still overpaying for their mortgage, this is very good news. Amid rising rent prices, renters can also take advantage of low rates to end up spending less on housing.

Is Refinancing A Good Choice?

Refinancing your mortgage isn’t always the right option. There are a few reasons for you to consider doing so. Like your first mortgage, a refinanced mortgage is a serious, long-term financial commitment. So, you’ll want to make sure you have a good reason to apply.

If you’re about to make a serious investment such as a major renovation or buying a new property, refinancing your mortgage is a good idea. You can also use mortgage refinancing as a means to consolidate your other debts. 

The most straightforward reason to refinance your mortgage is to simply save money. If current interest rates are significantly lower than they were at the time you secured your first mortgage, refinancing will lower your mortgage expenses.

Low Interest & Refinancing

The logic behind refinancing your mortgage when interest rates are so low is clear. You simply save more money on monthly payments and end up paying less for your mortgage overall. But there are still other factors you must consider at the same time. Low interest rates will serve you even better if you have:

  •  A high credit score

  •  A low debt-to-income ratio

  •  A stable income

Refinancing with the above while interest rates are low is a great financial choice.

What Should I Do?

If interest rates and your personal qualifications are ideal, you have several mortgage refinance options you could take.

Bank Refinanced Mortgage

Banks are typically willing to refinance a mortgage with a balance that’s less than the property’s appraised value. Each bank will have a slightly different offer, but they all lend money based on the same criteria. With an attractive financial situation and lower interest rates, you can take a new mortgage to pay the first off and spend less money in the end.

Government Loans

The CMHC offers guides for government-issued loans. 

Mortgage Brokers

You don’t need to go directly to a bank to get a mortgage. Many professional mortgage brokers can help you get the loan you need. It’s their job to assess your credentials and match you with a mortgage that meets your needs at the lowest cost.

HELOC

You can leverage your property’s value to secure a more flexible financing option. A Home Equity Line of Credit (HELOC) is, as the name suggests, a line of credit secured by your home’s equity.

While you can use a HELOC for any expense, it makes more sense to take advantage of low interest rates and take them to pay for expenses that increase your property’s value. Because HELOCs are secured with equity, they typically offer competitively low rates.

Conclusions

It’s best to strike while the iron is hot. If your current mortgage isn’t satisfactory, it’s a great time to look for the refinancing option that will make homeownership less of a hassle. With the right choice, you can achieve:

  •  Lower interest payments

  •  Some cash-in-hand

  •  Lower monthly repayments

  •  A longer repayment term

For more information, contact the Mortgage Refinancing Experts at Canadalend today at 1-866 iCAN LEND or better yet, Apply Online and one of our agents will call you!

If you’re unsure of how you’ll secure a loan, you may not have to look any farther than your home equity. In many cases, a home equity loan will be the cheapest kind of loan. They are also easy to get approved for in many cases.

A home equity loan comes in one of a few forms:

• A second mortgage
• Home equity line of credit (HELOC)
• A reverse mortgage

Reasons Home Equity Might Be The Best Choice

Cheaper

Home equity loans are seen as less risky from your lender’s point of view. Securing a loan with your home equity will usually lead to low interest rates. HELOCs are particularly inexpensive and are a great way to pay for large expenses at a relatively low cost.

Readily Available

Not everyone has access to other collateral to secure loans with. But if you own a home and have at least 20% equity in it, you have a valuable financial asset. The closer you are to having paid off your mortgage, the easier it will be for you to secure a loan.

They Have Many Uses

Unlike many other loan classes, you aren’t very restricted with how you spend your funds. When you take a home equity loan you can use the funds for a wide variety of expenses. The most obvious reason would be to make improvements to your home. But there are several good reasons (and many bad reasons) to secure a loan with your equity.

Good Reasons To Secure With Home Equity

Home Improvement

Using your equity to secure a home improvement is a straightforward financial choice that makes perfect sense. Why wouldn’t you use your home equity to improve your home and increase its value? Tapping into your equity to secure a loan allows you to produce even more equity, or to sell your home at a great profit.

Starting A Business

If you’ve come up with a great business idea, you may want to start a business. But starting a business is difficult, not to mention expensive. This is where a HELOC can help.

A HELOC is a line of credit that allows you to control how much money you want to borrow and when you want to borrow it. Business is inherently risky, so it’s good to have control over your borrowing.

Consolidating Credit Card Debt

Consolidating higher-interest debt is a financially sound reason to tap into your equity. Credit cards make it far to easy to rack up more debt through high interest rates. Rates are notoriously high for credit cards, with most starting at 19%. Some credit cards go as high as 29.99%.

You can use your equity to secure a debt consolidation loan. You would then use the loan to immediately pay off all your credit card balances. The result is you have one large debt to pay off instead of many smaller ones. But your interest rate on a home equity loan will usually be far lower than the rate on your credit card. That means you can save a lot of money and save your credit score at the same time.

Retirement

There is one way to tap into your home equity that stands out for its retirement benefits. A reverse mortgage can help you afford retirement through a repayment-deferred loan. If you’re simply short on cash for retirement, a HELOC is likely your better choice.

Emergencies

If you run into an emergency, none of the options you have will be great. But if you have emergency expenses, your home equity can enable you to pay for them. If you don’t have many other options, a home equity loan is an inexpensive alternative to credit cards or other fast personal loans.

Education

Education expenses are one of the major reasons people take home equity loans. Education is expensive, so you only have a few options for financing. A HELOC or second mortgage can be a good alternative to student loans.

What You Need To Consider

If you have equity in your home, you have the ability to get a good loan. But regardless of the size of your loan and what you’re using it for, you need to perform your due diligence.

The Value Of Your Home Can Decline

If you’re taking a home equity loan to cover your home improvement costs, you won’t necessarily see a significant return. No matter what you do, some forces are beyond your control. External factors can cause the value of your home to drop, even if you work to make it a nicer place to live.

You Still Have A Limit

Many of the uses of home equity loans will save or make you money. Other uses should be approached with caution. Frivolous personal expenses shouldn’t be covered with loans secured with your home equity. Some may claim that an expensive wedding or vacation can be paid for with a home equity loan. While it’s a possibility and a cheaper option, it’s better to save your equity for the expenses that can improve your life long-term. If you’re not careful, you can overspend and put your home at risk of foreclosure.

Securing a loan with your home equity is one of the easiest ways to get low interest rates. If you need a lot of cash, it’s a great way to use your most valuable asset (your property) to secure a loan.

While tapping into your home equity may seem attractive, you need to be careful. Home prices are higher in Canada than ever before and rising quickly, which makes home equity more plentiful. But if you aren’t careful, it’s your property that’s on the line after all. There are a few things you need to keep in mind if you want to use this powerful tool.

What You Need To Tap Into Your Equity

Using your home equity is fairly easy. But you will need to meet a few minimum requirements before you’re able to.

Equity

First, you’ll need to have sufficient equity available. Most lenders will need you to have enough to justify a loan. A good rule of thumb is to only consider tapping into your home equity if you have at least 20% in your home.

Credit Score

Lenders will have their own minimum credit score requirements. If your credit score is in the mid-600s or higher, you will have many opportunities for loans with lower rates. But having a lower credit score won’t necessarily hold you back. Lower credit scores will usually just mean higher APRs for your loans.

Debt-to-Income Ratio

Lenders want to see a reliable source of income for their borrowers. But they also want to make sure you’re not already struggling with debt. So, they’ll have a look at your debt-to-income ratio. If your debt-to-income ratio is lower than 40%, it shouldn’t stop you from tapping into your equity.

To be safe, it’s best to not take on significant amounts of debt. Unless you’re consolidating debt, if your debt-to-income ratio is already high, you might want to think twice.

Have A Good Reason

The best safety tip for tapping into your equity is to make sure it pays off. There are several ways you can ensure you’re getting an excellent deal. Frivolous spending with borrowed money is unsafe in many circumstances, not to mention pointless from a purely financial point of view. The goal is to produce a net gain for yourself.

Consolidating Credit Card Debt

Consolidating higher-interest debt is arguably the best reason to tap into your equity. Credit cards can easily set you up for a rough time if you don’t pay your balance at the end of the month. Credit card interest rates are notoriously high, with most at 19%. Some credit cards go as high as 29.99%.

You can use your equity to secure a debt consolidation loan. You would then use the loan to immediately pay off all your credit card balances. The result is you have one large debt to pay off instead of many smaller ones. But your interest rate on a home equity loan will usually be far lower than the rate on your credit card. That means you can save a lot of money and save your credit score at the same time.

Home Improvement

Using your equity to secure a home improvement loan is another move that just makes sense. When you make improvements to your home, you add value to it. That’s why tapping into your equity to allow you to sell your house for a much higher price just makes sense!

If your current equity allows for it, you can add a basement or another addon to your property. With the value this creates for your home, you could sell it for more.

Retirement

There is one way to tap into your home equity that stands out for its retirement benefits. A reverse mortgage can help you afford retirement through a repayment-deferred loan.

If you’re simply short on cash for retirement, a HELOC is likely your better choice.

Education

If you or someone close wants to advance their education, tapping into home equity is one way to do it. Like some of our other examples, education expenses are an investment for which you can get a great return. Because some equity loans, especially HELOCs, are so inexpensive, they are good options for paying education expenses.

Place Safe Limits

Regardless of what you want to spend your money on, there is always a financial line you cannot reasonably cross. That’s why if you’re not borrowing money to reduce your debt, you can’t afford to borrow too much.

One factor to be aware of is the loan’s APR. An APR can be sneaky because it’s not quite the same as an interest rate. For example, a $10,000 loan with a 5% APR and a 5-year repayment term will mean a monthly repayment of $188.71, but a total of $1,605.48 in interest payments. But what if the repayment term is just 2 years? It would cost you $443.43 per month and you would pay $642.26 in interest.

To make sure you don’t overburden yourself. Do the math on any loans you are considering taking. Fortunately, there are plenty of online APR calculators that can determine your monthly repayments and the total amount you’ll pay in interest.

What Is A Safe Loan?

Safe is a subjective term. But there’s a reason many lenders will cut you off with a debt-to-income ratio higher than 43%.

If you’re already overburdened with debt, it’s risky to take on more debt. So, ask yourself what you will get out of your equity. Tapping into your equity can help you reduce debt if you approach it safely.