Home equity loans are frequently chosen by people who wish to pay off debt, finance schooling, or make renovations. Because this sort of mortgage has set rates and payments, consumers can organize their finances appropriately and prevent financial loss. This mortgage is secured by your home, so if you don’t make payments, the lender can take it away. In other words, it serves as your assurance that you will finally repay your account.
Let’s examine home equity’s definition and operation in Canada in more detail.
What Is a Home Equity Loan?
- A home equity loan is secured by your house.
- Your home may be seized by the bank if you are unable to make payments.
- Your home equity determines the loan amount.
- With lower interest rates than unsecured loans, it functions similarly to a second mortgage.
- Generally speaking, you can borrow up to 80–85% of the home’s appraised worth, less the amount of your outstanding mortgage.
- An Example of a Home Equity Loan: For instance, you have $400,000 in equity for a $700,000 home with a $300,000 mortgage. The maximum amount you may borrow is $260,000, which is 80% of $700,000 less $300,000.
How Does a Home Equity Loan Work in Canada?
Getting home equity loans up here in Canada usually goes something like this:
- Figure Out Your Equity: It all starts with knowing just how much of your home is truly yours. The lender figures out your accessible equity by appraising your home and then subtracting what you still owe on your mortgage.
- Apply and Get Approved: You’ll fill out an application, hand over financial information like pay stubs and employment details, and they’ll check your credit. Then, the lender looks at your ability to pay it back and decides on a loan amount and interest rate that works for both of you. They’ll be checking your credit with agencies like Equifax and TransUnion to get a handle on your creditworthiness.
- Get a Lump Sum: Unlike a line of credit, where you draw money as needed, a home equity loan gives you the entire amount upfront. This is awesome for big, one-time costs like a major home makeover, consolidating those killer high-interest debts, or footing the bill for your kid’s education. Word on the street is, renovation costs can easily balloon past $50,000.
- Fixed Rate, Predictable Payments: Here’s a big plus: most home equity loans come with a fixed interest rate, meaning the interest rate on a home equity loan stays the same for the entire loan. That makes your monthly payments nice and predictable, which is handy for budgeting. The loan term is most often between 5 and 20 years.
- Know the Risks: Here’s the serious bit. Your house is on the line. If you can’t keep up with payments, you could lose your home to foreclosure because it serves as collateral. Make absolutely sure you can handle the payments before you sign anything.
Home Equity Loan vs. Mortgage Loan
While both a home equity loan and a mortgage loan are secured by your home, they serve two totally different purposes:
- A mortgage loan is what you use first to actually buy the house. This agreement is recorded as the first legal document with the property, marking the first lien. Mortgage services in Canada come in all shapes and sizes, with different terms, payment schedules, and interest rates designed specifically for homebuyers.
- A home equity loan comes later, once you’ve built up some equity. Think of it as a second lien on the property, and that’s why its interest rate tends to be a little higher – the lender’s taking on a bit more risk. It’s worth understanding the order of the liens that can be attached to your property.
What Is a Good Home Equity Loan Rate?
When it comes to home equity loans, the interest rate is crucial. Because it’s usually fixed, you get some stability, but a few things can affect what rate you’ll get:
- The Prime Rate: The prime rate set by the Bank of Canada is frequently the basis for lending rates. When the prime rate goes up, so do loan rates.
- Your Credit Score: A solid credit score tells lenders you’re less risky, so you might get a lower interest rate on a home equity loan.
- Loan-to-Value (LTV) Ratio: This is how much you’re borrowing compared to your home’s value (including your mortgage and the home equity loan). A lower LTV usually gets you a better rate because you have more equity in the home.
What counts as a good home equity loan rate depends on what’s happening in the market. Because interest rates are all over the place, a “good” rate today might not be so great tomorrow. Shop around and compare offers from different lenders to find the best fit for your unique financial situation. There are websites available that help you with this task, and many have experts ready to help.
Home Equity Line of Credit (HELOC) vs. Home Equity Loan
Although “home equity line of credit (HELOC)” and “home equity loan” are sometimes used interchangeably, they are actually quite different:
Home Equity Loan
- One lump sum of money
- Fixed interest rate & fixed monthly payments
- Good for one-time big expenses (renovation, debt payoff)
HELOC (Home Equity Line of Credit)
- Functions similarly to a credit card: borrow, pay back, borrow again
- Variable interest rate (payments can change)
- Good for ongoing or unpredictable expenses (projects over time)
The benefits of a home equity line of credit include having more flexibility to borrow as needed and only paying interest on what you actually use. Keep in mind, however, that the lower level of predictability for payments may not be right for everyone.
The Equity-Rich Advantage
Big banks tend to push one-size-fits-all solutions that don’t always work for everyone. Here at Equity Rich, we truly think every homeowner is unique, so we create custom plans to fit your exact needs. We offer a custom-built solution based on your specific needs and affordability.
We consider the entirety of your financial situation rather than just your credit score. We can assist you in finding a solution that aligns with your long-term objectives and enables you to reach your full financial potential, whether you want to undertake a significant renovation, consolidate debt, or deal with an unforeseen emergency. Equity Rich can assist you in reaching your objectives. Make use of your home equity by getting in touch with Equity Rich right now!