Our blog

iStock.com/SARINYAPINNGAM

A lot of Canadians are house rich and cash poor; meaning, they’re good at paying down their mortgage, but at the end of the day, don’t have a lot of disposable income. That can make it difficult for the average Canadian to come up with the much-needed funds for an unexpected expense, purchase, renovation, debt consolidation, etc.

Two of the most popular ways for homeowners with more than 20% equity in their homes to free up some cash is with either a home equity loan or home equity line of credit (HELOC). They sound alike, but they’re very different; understanding these differences will help you decide which one is right for you.

What Is a Home Equity Loan?

A home equity loan, often referred to as a second mortgage, is secured against your property. It acts like your primary mortgage and is second in line to get paid off should there be a default.

After you are approved for a home equity loan, the lender will send you a one-time lump sum payment that is paid off over a set period of time with a fixed interest rate, and predetermined monthly payments. Just like the primary mortgage, you are charged interest on the total amount of the home equity loan as soon as you receive it.

Credit Limit with a Home Equity Loan

With a home equity loan, you can borrow up to 80% of your home’s appraised value, minus the unpaid balance on the primary mortgage.1 The interest rate can either be fixed or variable. While the interest on a home equity loan is generally higher than on the existing mortgage, it is a lot lower than other types of loans.

Uses for a Home Equity Loan

Anything! It’s your money, you can use it for anything you like, including renovations, debt consolidation, paying for tuition, a wedding, investing. The sky’s the limit!

What Is a Home Equity Line of Credit (HELOC)?

Like a home equity loan, a HELOC is secured against your house and allows you to access the equity you’ve built up in your property from paying down the mortgage and as the price of the home has increased.

A HELOC is a revolving line of credit with an adjustable interest rate that goes up and down with the markets. As a line of credit, the money is deposited into an account that you can access as little or as much as you want, whenever you need it. Unlike a second mortgage, there are no fixed repayment amounts; the lender usually only requires you pay the monthly interest on the money you use.

Credit Limit with a HELOC

The credit limit on a HELOC combined with a mortgage is 65% of the home’s purchase price or market value. You can increase the credit limit on a HELOC to 80%, but only if it is combined with a regular mortgage.

Using a HELOC to Pay Down a Mortgage

You can use your HELOC for anything you like. You can even use a HELOC to pay down a mortgage. The interest rate on a HELOC is blended or the same as your usual mortgage. Because it can be blended, a lender can change the HELOC rate at any time.

Does that mean you shouldn’t use a HELOC to pay down your mortgage? Not necessarily. The interest on a HELOC might be a little higher than the interest on your mortgage, but you’re only charged interest on the amount you actually borrow from the HELOC, not the entire amount—like you are with a mortgage.

The same payment using a HELOC compared with a mortgage actually pays down more principal; the mortgage then gets paid down a little faster and with less interest.

A Home Equity Loan or HELOC: Which One Is Right for You?

That’s something only you and your lender can decide on. But there are times when one might make more sense over the other.

For example, a home equity loan might be a good choice for homeowners who need upfront money for a one-time event (renovations, wedding, etc.) and like the idea of a fixed-rate loan.

If, however, you want to have access to the money over a longer period of time, a HELOC might be a good idea. Especially if you can pay the amount you borrowed back right away; this would mitigate any costs associated with a variable interest rate.

Or, if you’re a homeowner with bad credit or only have less than 20% equity built up in your home, you might want to look at getting a home equity loan from a private lender. Private lenders do not have to follow the same strict guidelines that Canada’s big banks do. Instead of hurdles, private lenders provide you with more options, freedom, and flexibility.

Canadalend.com, Helping Ontarians Access Their Home Equity

The vast majority of Canadians have not saved up money for a rainy day. That’s why more and more homeowners are accessing the equity they’ve built up in their homes; either with a home equity loan or HELOC. And no one is better at helping property owners tap the equity they’ve built up in their homes than Canadalend.com.

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. That means Canadalend.com can find you a lender that will provide a home equity loan or HELOC that the big banks can’t.

Apply online in 60 seconds & get approved now!
Call us for more information 905.881.0242

If you’re a homeowner and are looking to take out a home equity loan or HELOC, contact Canadalend.com today. We’ll evaluate your current financial situation and help you find a lender that can provide you with a financial product that suits your needs. 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:

“Borrowing against home equity,” Government of Canada, January 31, 2018; https://www.canada.ca/en/financial-consumer-agency/services/mortgages/borrow-home-equity.html.

It used to be that the three long term commitments in a person’s life were their job, their marriage, and their mortgage. Over the years there has been a decline in the job-for-life ethos and social change has meant people may live together for many years without getting married. The mortgage, however, has stayed relatively similar to how it was, aside from the continuing cycle of rate changes.

What has become increasingly common is homeowners utilizing a second mortgage, either for a fixed sum or line of credit, for personal or property-based reasons.

How Second Mortgages Work

Primary (or “First”) mortgages are a straightforward concept, you borrow a lump sum to purchase a property and pay back the loan, with interest, using the house as a guarantee. A second mortgage takes a more refined approach.

A second mortgage is levied against the equity that has accrued in your property over time. The equity increases in value in several ways; it increases as you pay off your primary mortgage, as the real estate market grows in strength, and when you improve the property’s value through regular maintenance and improvements.

While a primary mortgage is a fixed amount lump sum, secondary mortgages can offer an additional line-of-credit option. With a line of credit, you make the same basic agreement with a lender, a total amount versus the equity value in your property, but you do not have to take the whole sum. Instead, it can be used as a fund that you draw upon as and when needed up to the maximum agreed with the lender.

With both types of loan, fixed and credit, lenders will determine your equity value and then allow you to borrow up to a certain percentage of it, usually topping out at around 80%. This is to protect lenders and borrowers from changes in the market and personal circumstances.

Second Mortgage Rates

Both the lump sum and credit options come with the expected rate options; fixed or variable. While there are many lenders, with many different options, the general rule of thumb is for lump sum loans to include a fixed rate option and for line-of-credit loans to be based on variable rates.

It is also worth noting that interest rates on secondary loans are higher than those on primary loans. This is to protect lenders in the event of foreclosure. If you have a primary mortgage with one lender, and a second with another, the primary mortgage gets paid off first by the foreclosure, with anything remaining going towards the secondary loan.

As with any kind of loan be prepared to do some extensive reading on the proposed fees and penalties associated with your loan. These can run the gamut from paying for credit checks in advance of a loan being approved, right through to closing fees at the end of the loan’s schedule or for early repayment.

What Second Mortgages Are For

As noted above one of the factors in increasing equity value is repairs and improvements to a property.

The core idea of borrowing to make these kinds of improvements is raising the value of your property by a sufficient amount that makes repayment of the loan easier when the time comes to sell. There can also be ancillary benefits to making ecological improvements to a property. Reducing the carbon footprint, or raising the energy profile, of a property can have a tax-deductible benefit to it. This varies across provinces, but it is worth considering if a loan for these alterations could have a tax benefit for you.

A second mortgage can also provide more personal support in the form of debt consolidation. Access to a lump sum can allow borrowers to pay off multiple debts and reduce the total amount of interest they are paying on those debts. By focusing the debt in this way, it becomes more manageable, the risk of defaulting any particular loan is reduced, and a continual series of on-time payments can improve your credit score.

Choosing a Second Mortgage Product

Second mortgages are no different to primary in that there is a great diversity of products available for lenders to choose between. Each with a different set of rates, schedules, penalties, and small print clauses. Borrowers want to get the best deal they can, one that matches their needs, but the sheer breadth of choice can be overwhelming.

At Canadalend.com we have a dedicated team of experts who have decades of experience connecting borrowers to the products that fit their needs and expectations. They can do this because they work independently of any lending organization. They are not being incentivized to sell you a specific product, they work with you to find the right product for you.

Whatever your circumstances, whatever your reasons for considering a second mortgage, contact Canadalend.com today to start exploring your options with one of our experts.

When the time comes to consider a secondary loan, it may be worth considering your home equity position. Equity builds up in your home, or other property, over time, as you pay off a loan secured on it. This equity is the percentage of the property you own through repayments of the first loan.

It has become increasingly popular for borrowers to utilize this equity as a form of guarantee on a second loan. Home Equity Loans can be used for a variety of reasons. Depending on what you want, the loan is for will determine what type of home equity loan you should be considering.

Home Equity Loan

The standard Home Equity Loan (HEL) works much like a regular loan. You and the lender agree on a schedule for repayments along with interest rates, penalties, etc. On the whole, you may find the interest rate on a home equity loan is slightly higher than a standard loan. This is because it is the second loan on the same property. In the event of your bankruptcy, the first lender will be paid first from the sale of your estate. If there's nothing left after that, the second lender doesn't get paid.

To minimize the potential for paying a higher rate, borrowers are best advised to shop around. The major banks are a good place to start, but it’s also worth seeing what an alternative lender might have to offer. They can often equal, if not beat, bank rates and can be more flexible on terms, fees, and penalties.

Home Equity Loans are often used as a way to pay bills. If this is the case for you, keep in mind that most banks will want to see a good credit score and predictable future earnings.

Home Equity Line of Credit

A home Equity Line of credit functions in the same way as a HEL, the equity in your property determines how much you can borrow. However, instead of the loan amount being made available to you as a lump sum at the start of the schedule, it instead forms a pool of money you can draw from.

This form of loan is particularly useful for borrowers that want to undertake a period of repairs to their home. This may be part of ongoing regular maintenance and upgrades, or it might be in the year or so before putting a property up for sale.

Having a pool of money that you can borrow from as and when you need to allows borrowers to plan with confidence without the worry of how they will pay any particular bill for works as and when it comes. They can simply release funds from the line-of-credit pool, and know they're not going to overspend the initial borrowing figure.

Home Equity Lenders

As previously mentioned, Home Equity Lenders can sometimes get the worst part of a bankruptcy situation. When dealing with banks, their inclination is to penalize the lender with higher rates. This is their way of protecting themselves against the worst, even if it doesn't happen.

Many Canadians who take out Home Equity Loans find a better deal through alternative lenders such as credit unions or other financial institutes. The advantage of these lenders is their flexibility, where banks tend to lean towards rigidity. The downside? There are only a few major banks; there are a lot of alternative lenders.

At Canadalend, our independent experts have access to hundreds of different lenders and their financial products. Unlike advisors at a bank, they don't get incentivized to sell you a certain product. Their sole concern is finding the lender and product that meets your needs, whether that's a Home Equity Loan or a Line of Credit.

To find out how you can make your home equity start working for you and your future, contact Canadalend.com today and talk to one of our experts.

With the country still dealing with the COVID-19 pandemic, it is getting increasingly difficult for Canadians to meet their monthly financial obligations. Working through a job loss or reduction in hours has affected many of us, and government funded programs – like the Canadian Emergency Response Benefit (CERB) – can only cover so much. Households are finding it tough to keep food on the table, let along pay down their mortgages and other high-interest debt, such as credit cards.

Homeownership at times like these have its benefits. You can use the equity you have built over the years to consolidate some of your high-interest debts into one, easy to manage monthly payment. Even in a risky financial climate, like this one imposed by COVID-19, you can pay down your debts as well as cut down your overall monthly expenses. Interest rates are also currently at a record low, so it has never been a better time to start looking into consolidating outstanding debt. 

What Is Home Equity & How Can You Access It?

The difference between the current value of your home and the unpaid balance of your mortgage make up your Home Equity. Over time, your equity grows as you make more and more of your mortgage payments, and the percentage of ownership rises. Other factors, such as market activity, can also substantially increase the amount of equity that you have access to and can leverage. 

Homeowners looking to access their Home Equity have two options for financing: A Home Equity Loan or Home Equity Line of Credit (HELOC). A Home Equity Loan, or Second Mortgage as its often referred to as, allows you to withdraw a lump sum of money based on your available equity. You would then make monthly payments at a locked interest rate until the time of renewal. This is great if you are looking for a larger sum of money – anywhere from $20,000 to even a $1,000,000 depending on the home value.

If you choose to refinance, or take out additional equity, can use this extra money for anything from debt consolidation, investments, home renos, education, or other life expenses.

Borrowers looking to access their available home equity also have the option to pursue a Home Equity Line of Credit (HELOC). This allows you to withdraw cash from the line of credit and repay it as you find necessary, as long as the minimum monthly interest payments are made. You do not need to take out the whole line at once, it can be used more like a credit card, but at much lower interest rates. Like Second and Third mortgages, homeowners with multiple high-interest credit card debts, or high-interest loans find HELOC’s very appealing. This ability to allow the borrower to pay only one interest-only payment, at a much lower interest rate, can make monthly financial obligations much more manageable. 

Advantages Of Consolidating Debt Through A Second Mortgage or Mortgage Refinance:

Increased cash flow: Multiple high-interest debts consolidated into one lower interest rate can increase your available monthly income and help you save money over time.

Customized financial plan: Our Mortgage Professionals can help you create a loan and debt repayment plan, spread over a 2-5-year period, to help reach – and maintain – your financial goals.

Streamlined payments: Multiple larger monthly payments can be combined into one single lower monthly payment with a lower interest rate that can help you pay down your debts faster.

Credit score: Individuals with a poor credit score can qualify for a second mortgage. This can help Borrowers to pay off their high-interest debts and start rebuilding their credit. When applying for a future mortgage or refinance, these factors can make all the difference.

Principal repayment: When individuals are forced to pay off high levels of credit card debt using only their income, they are often not able to pay the whole sum. Instead, they are left paying the minimum payments which often pay solely for the interest itself. This endless loop can leave someone in a great deal of debt, stress, and substantially limit their financial standing. A Second Mortgage, or HELOC, can allow you to pay the total sum of your credit card debt and only worry about making the appropriate monthly payments.

As you can see from the examples above, tapping into your home equity through a Second Mortgage, or Refinance, can be quite advantageous. A Private Mortgage is also a great option for potential borrowers with bad credit that are worried about the often complicated approval process. Since homeowners are using the equity built into their home, they are seen as less of a risk to potential lenders. The application process becomes much quicker and more streamlined. Home Equity Loans can also be very beneficial to self-employed individuals who have a difficult time with reportable income.

If you are interested in accessing your home equity and consolidating your high-interest debts, the trusted Mortgage Brokers at Canadalend can help get you approved quickly and easily. With access to a very large pool of private lenders, banks, and credit unions, Canadalend will work tirelessly to get you the best mortgage rate for your individual needs.

Call Canadalend today at 905-881-0242 or email us at info@canadalend.com to speak with an experienced Mortgage Broker who can help you get out of debt faster.