Our blog

There can be a lot of confusion about home equity loans, its benefits and why one should consider it. A home equity loan is simply a type of loan that allows a borrower to use the equity of their home as collateral.

There are some Good Reasons for a Home Equity Loan

It comes down to responsible borrowing but for those in a serious pinch, this type of loan makes a lot of sense. In certain cases, and used properly and strategically, it can even provide a return.

This is a Great way to Tackle Home Improvement Projects

A home equity loan to improve your home is smart if you’ve done your homework and the renovations improve or fix an aspect of your home. Renovations can be pricy and most cannot go out of pocket for them. This is one of the main reasons that this type of loan exists and is worth considering.

If your home has increased in value, then you’ll have even more equity to borrow against in the future.

A Home Equity Loan can give you a Pool of Cash for Investing

Investing is an acceptable but less popular reason to apply for a home equity loan. You can borrow against the equity of your home at a low rate and then use that money to invest. Obviously, this is only recommended for those with experience, knowledge and a proven track record.

Paying for an Education

Many people struggle to pay for their education or for their children’s education. Even in Canada, where it is subsidized, it can be daunting. A home equity loan can help ease that burden, and while there are risks associated, it can pay off in the long term.

A Medical Emergency could Require a Quick Cash Infusion

As opposed to other loans and line of credits, a home equity loan to deal with a medical emergency is justified. It is also a much better idea to apply for this kind of loan than putting these types of expenses on a credit card.

And that brings us to Credit Card and its Debt

Borrowing against the equity of your home to pay off credit cards is never advisable. It is not considered a cure for consumer debt, especially considering that credit card debt is unsecured.

There are a lot of strong reasons to borrow against the equity built up in your home, and the best advice is to speak with the trusted professional.

For those considering a home equity mortgage and are new to its potential benefits, the best course of action is to speak with an experienced, trusted professional. Knowing exactly what questions to ask is important so that you can get the answers you need and make an informed decision.

Is my Reason for Applying for a Home Equity Mortgage a good one?

The first thing you want to do is disclose why you are considering a home equity mortgage. An honest mortgage professional will tell you whether this type of loan is appropriate for your needs. For instance, if you are planning to borrow against your home to pay off a credit card debt or take a cruise, they should immediately dissuade you. If you are considering this type of loan to improve your property for future real estate, then they should reassure you that that is typically an acceptable reason.

What is the Repayment Structure?

With any loan, you want to make sure you understand every aspect of it and an important aspect is how you will be expected to repay. Every loan and lender is different and while it might seem obvious, no matter how badly you need the loan this isn’t a question you want to gloss over.

Are the Terms of the Loan Negotiable?

Even if you know the interest rate and terms of your home equity loan going in, you should always ask if there’s room to negotiate. Even if the answer is no, it’s better to ask and try to walk away with more value. The goal is to enter into the best arrangement for your financial future.

Don’t be Scared to ask for the Fine Print to be Explained to you

There’s a lot of fine print with a home equity loan so take the time to peruse and ask questions before signing. Some of it will feel minute and insignificant but it can be anything but.

There’s no such thing as a dumb question and no professional will expect you to understand what it all means. The onus is on you to ask the right questions.

Renovating a house or office is a pain. There’s no way around it. The space becomes a construction site, there’s a constant stream of workers entering and exiting and you will most likely experience at least one if not several delays.

In the long run, there’s a lot of benefit to undergoing a renovations project even if the short-term pain is significant.

Renovations can add a ton of Value to your Property

Just about any upgrade to your house can immediately increase its overall value, especially if it’s more than cosmetic. New appliances, floor or carpet refreshes or a room renovation that modernizes or makes it more functional are all investments that should provide a return when you sell.

Some Renovations are better than Others

If you want to feel the value that renovations can make to your home than focus on the kitchen. This is the room that can have the largest impact. Before demolition, do your research to find out which kitchen trends are popular.

Small Touches Can Transform a Space

Most people focus on the large overhauls for houses and offices but sometimes the lighter touches can be the most dramatic. Something as small as under cabinet lightning can make a big difference to a kitchen. Replacing laminate flooring with hardwood can completely change the atmosphere of a room. Get creative and consider millwork and finishes as much as the bigger items.

Focus on Modernity but There’s a Caveat…

The question to ask yourself when renovating is does this reflect modern tastes and sensibilities. Even if something is meant to be kitsch or retro it can still reflect what is on trend. While renovations today might look dated in 10 years, you should consider when you might sell and speak to contractors about how easy future updates might be.

Renovating takes a savvy mind and a lot of patience. If you can withstand the psychological trauma that might come with the experience, you could be find your pockets lined with a healthy return on your investment.

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.