When you need a loan there are a number of different routes you can take. Some are better than others. You can borrow from family, take out a line of credit with the bank, or even use the overdraft in your bank account. If you’re a homeowner though, you’re in a very unique position. While often overlooked, you can tap the equity you’ve built up in your home with a home equity loan.
Whether you need money for a project, unexpected expense, or want to consolidate debts that have higher interest rates, one option is to borrow using your home equity as security.
“Home equity” is the difference between the value of your home and balance of the current mortgage. For example, if your home is worth $400,000 and you owe $150,000 on your mortgage, you have $250,000 in home equity. Best of all, your home equity increases every time you make a mortgage payment and as the value of your property increases.
If you have more than 20% equity in your home, there’s never been a better time to take out a home equity loan. The Ontario housing market remains resilient, interest rates remain near record lows, and the provincial economy is improving.
How Does a Home Equity Loan Work?
A home equity loan works a lot like a mortgage, in fact, home equity loans are often referred to as a second mortgage. Just like a mortgage, a home equity loan is secured against your property.
After getting approved for a home equity loan, the lender will send you a one-time lump sum payment that gets paid off over a set period of time, with predetermined monthly payments.
Just like the first mortgage you took out on your home, you are charged interest on the total amount of the home equity loan as soon as you receive it.
How Much Can You Access with a Home Equity Loan?
With a home equity loan, you can borrow up to 80% of your home’s appraised value, less the unpaid balance on the existing mortgage.1
When you get a second mortgage, you are now responsible for two monthly mortgage payments. In the unfortunate event of a default, your home would get sold and the first mortgage would get paid with the proceeds (along with any fees and penalties) before the second mortgage does.
How Do You Qualify for a Home Equity Loan?
You must be approved before you can borrow from your home equity. It’s also important to note that not all financial institutions offer home equity loans. Even for those lenders that do provide home equity loans, the requirements can vary. One thing is certain though, when it comes to Canada’s banks, the bigger the lender the stricter the lending rules.
Below are some of the requirements needed to qualify for a home equity loan.
- Loan-to-value ratio lower than 80%: To get a home equity loan, you need to have built up at least 20% of equity in the value of your home. An independent appraiser will determine this number.
- A debt-to-income ratio of 43% to 49%: The debt-to-income ratio is the percentage of monthly gross income that goes toward paying your debts.
- A credit score of 620 or higher: Credit scores (300 to 900) show lenders how likely you are to pay your bills on time. The higher the score, the lower your risk. To get the best rate, some lenders insist on a minimum score of 680.
Benefits of a Home Equity Loan
Lower Interest Rates
One of the biggest draws of a home equity loan is the lower interest rate. The interest rate is lower than other types of loans because it is secured by your home equity. The interest rate on a home equity loan can be either variable or fixed, and is usually higher than the first mortgage, but it is a lot lower than other types of loans; especially credit cards.
Up Front Cash
Home equity loans are great option for property owners who need the money for a large expense or expenses and know exactly how much they need. Because you are paying two monthly mortgage payments, which can seem daunting, home equity loans are ideal for those who can pay it off in a relatively short period of time, like three to five years.
Most home owners are not aware of the tax breaks associated with a home equity loan. You can deduct the interest on a home equity loan from your taxes if you invest the money you borrow.
Improve Your Credit
Qualifying for a home equity loan can help improve your credit score because your payment history is the most important factor when it comes to your credit score.
To improve your credit score:
- Always make your payments on time
- Contact the lender if you think you’ll have trouble paying a bill
- Don’t skip a payment even if there is a dispute
- Make a minimum payment if you can’t pay the full amount
What Can You Use Your Home Equity Loan For?
The lump sum payment you get with your home equity loan is perfect for making a large purchase or number of big purchases. For example, you can use a home equity loan to renovate or improve your home. In doing so, you actually increase the value of your home and gain more equity.
A home equity loan is also perfect to cover big expenses, like a child’s wedding, helping with tuition, a car, recreational vehicle, and for unexpected medical bills.
There is a long tradition in Canada of homeowners paying off their mortgages. It’s a rarity for those to get behind on mortgage payments in Ontario and delinquency rates in Toronto are low. For private lenders, home equity loans are one of the safest financial vehicles to get involved with.
How Canadalend.com Can Help You Secure a Home Equity Loan
Unlike the big banks, which only try and sell you their own financial products, the licensed mortgage professionals at Canadalend.com are independent. We have access to hundreds of different lenders, which means we can find you a lender that will provide you a home equity loan. If you’re a homeowner and are looking to take out a home equity loan, contact Canadalend.com today or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.
1. “Borrowing against home equity,” Government of Canada, March 7, 2018; https://www.canada.ca/en/financial-consumer-agency/services/mortgages/borrow-home-equity.html.