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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.

Tax Breaks

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.

Sources:

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.

There are lots of great reasons to apply for a home equity loan. Some of the more popular ones are renovations or a medical emergency. One of the lesser known reasons that people look to a home equity loan is to buy investment properties.

Is this a good idea? It’s not a straightforward answer so let’s look at the pros and cons.

Should People use their Home Equity to Invest?

A property owned for the sole purpose of being flipped or rented can be a great investment especially in a market like the GTA. Using a home equity loan to fund this type of venture is a hit or miss proposition based on the competency of the applicant. Most industry professionals will tell you that using your home equity to fund a side business or investment is a good idea.

Pro: If you have the Right Experience and Personality then you could find Success

Rental properties can provide a steady income and even pay for themselves if you put in the proper work and buy in the right neighbourhood. If you focus on the numbers and not the emotion or delusions of grandeur you could experience a very healthy return on your investment.

Pro: One of the more Stable Markets

The housing market in the GTA has proven to be strong year over year. Very few markets can make the same claim of stability so if you’re looking for a sound investment and the chance to put in a little elbow grease than an investment property is might be your calling.

Con: Every Market has some Volatility

There’s always volatility within the market and you must be prepared for the long haul. Whether you’re flipping or renting, it’ll take time to make your money back. With all investments, a realistic approach is best.

Con: There could be Trouble if you don’t Flip or Rent Fast

Not only will you have to pay the down payment you’ll also have to cover all the costs associated with buying a home. If you can’t flip or fill it fast you might be paying for two homes which for most can be strenuous.

The best thing to do is sit down with a trusted professional and decide if a home equity loan for an investment property is right for you.

House Hunting is tough, there’s no doubt about it. It’s stressful and time consuming and there’s a lot to know if you want to do it right.

Here’s some dos and don’ts that can help guide your hunt and make sure you make an offer with confidence on the best home for you.

Do set a Budget

A lot of hunters think that a few thousand dollars paid over 25 years is so big deal. While you shouldn’t let your dream home slip away, every dollar counts and there will be interest paid on every dollar borrowed for the purchase. It’s okay to be flexible but still wise to set a budget.

Do Invest in a Home Inspection

You need the trained eye of a professional to inspect the plumbing, appliances and to determine if there’s any lingering problems or potential ones on the horizon. The average person doesn’t have this knowledge or these skills, making a professional home inspection a worthy investment.

Do Shop for a Rate

The interest rate and associated terms are crucial to your financial health so make sure you are getting the best deal. To do this, you need to shop around and be well informed about the future prognosis of mortgage rates to see if waiting a bit makes sense.

Don’t Trust Every Word of a Listing

Listings are ads. They are designed to intrigue and entice, to compel the reader to take the next step. There’s also a lot of grey area and it’s easy for agents to play with wording. How new do “new appliances” have to be for it to be accurate? Impossible to answer and those who craft listings know that.

Don’t Overbid just for the sake of Winning

Bidding on a house or condo is thrilling. The anticipation can be a rush and that moment where your bid is chosen is a feeling of total euphoria. It’s important to know that while winning is great you want to pay fair value, which means curbing any impulses to blow your opponent out of the water.

The biggest do of all is to surround yourself with knowledgeable professionals that you trust and who can guide you on what to do and what not to do, helping you come out on top.

You’re a homeowner. It’s your name on the title and your one goal is to maximize the profit on the sale of your home. Here’s what whoever is representing your home must do:

• Price your house accurately
• Qualify buyers
• Advertise the listing
• Understand mortgages, regulations and contractual law
• Coordinate all the details of a closing

With this established, let’s look at the pros and cons of selling your home without an agent.

Pro: You Save on Several Fees which can Equate to Thousands of Dollars

Unless you have something against real estate agents, the main reason to avoid working with one is to save money. Since it’s not a small amount of money, it’s understandable if this is attractive. There’s always a risk of losing money in other areas due to inexperience but you will save substantially on agent fees.

Con: To do it Right you must Treat it as a Full-time job

Selling a home involves a lot of work. From research to staging to open houses to negotiating the deal, selling a home isn’t as simple as putting a “for sale” sign on your lawn. You should enter the process knowing that it is more than a hobby and requires daily commitment.

Pro: Complete Control

This one is no surprise. Some people want the control and are comfortable being responsible for every aspect of a sale. You will position every piece of furniture in your home, you will write every word of a listing and you will negotiate every term of the contract.

If this appeals to you, then you might fare well without an agent.

Con: You are Assuming Legal and Financial Risks

This is a big one. There are tons of legal and financial risks associated with real estate. One wrong step could cost thousands or have severe legal ramifications. It’s vital to weigh out the cost savings vs. the financial risk involved along with the potential cost of common legal issues.

Selling your own home is risky but that’s not to say that you can’t or shouldn’t do it. It comes down to comfort, personality and situation. Just know that if you go this route, it will take up a ton of time, could cost more in the end and there’s the potential for fall out.