Home Equity Loans

Home Equity Loans in Canada

For most Canadian homeowners, applying for a home equity loan is one of the best ways to secure a low interest rate. Because this kind of property is often your most valuable asset, getting money from your home equity can help you finance larger investments. Determining your home equity is a simple calculation: just subtract the amount you currently owe on your mortgage from the value of your property. But selecting the right lender is a more complicated process.

Smarter Loans have simplified things a little with this listing of home equity loan providers in Canada. Below, you’ll find all the information you need to compare your home equity financing options, as well as learn more about this type of loan.

We encourage you to research the benefits of home equity loans, and to consider which option will give you the most flexibility.

Whether you opt to refinance your home, borrow a prepaid amount or open a home equity line of credit (HELOC), the right lender is out there for you. Weigh your decision, and once you find a lender you like, click “Apply Now” next to their listing to go directly to the application on their website. Alternatively, you can pre-apply here on Smarter Loans, and we will connect you with a suitable lender for your situation. One of our partners will reach out to you shortly to process your loan request.

We can help connect you with the home equity loan providers in Canada.

Pre-Apply for a Home Equity Loan Now

Top Home Equity Loans Providers in Canada

Interest Rate
$10,000 and up
Varies (Home Equity Loans)
12 Months
Starting at 4.45%

What is a Home Equity Loan and How Does it Work?

A home equity loan is a revolving line of credit secured by the equity in your home. Home equity loans can be a convenient and flexible way to borrow money from your home on the cheap when done right. (It’s a lot less costly than carrying a balance on your credit card.)

In order to get the most out of your loan, you want to use the borrowed funds on something that’s likely to help improve your financial wellbeing in the future. You’ll also want a plan in place to pay it back in a reasonable period of time. (It can be easy to fall into the trap of only paying the interest, but you’ll literally find yourself in the same place several months or years later.)

Just how much equity can you borrow from the equity in your home? Currently, you’re able to borrow up to 65% of the appraised value of your home. But keep in mind that your mortgage and home equity loan together can’t exceed over 80% of the value of your home.

Main Benefits and Uses of Home Equity Loans

Consolidate Debt

Are you carrying a lot of high interest debt? With credit card interest rates typically at 19% or higher, it can cost you a lot in interest, not to mention take you a long time to pay off. By taking advantage of a home equity loan, you can save substantially on interest (if you have good credit, most lenders offer these loans at prime + 0.5% or 1%). This will help you pay off your debts sooner.

Home Renovations

Are you thinking about renovating your home? Instead of putting it on your credit card, why not use a home equity loan? If you’re borrowing a lot of money and you won’t be able to pay it off anytime soon, a home equity loan is ideal. Not only is it at a lower interest rate than a credit card, you can pay back what you owe on a schedule that works for you.

Flexible Repayment Terms

If cash flow is your main concern, a home equity loan may be a good product for you. With home equity loans, the payments are a lot less onerous. Unlike most mortgages where you’re required to make payments comprising of principal and interest, with a home equity loan you make interest only payments if you so choose. This is less of a strain on your cash flow, especially during tough financial times, such as job loss.

A Few Things to Consider

Interest Only Payments

Although flexible repayment terms can be an advantage, they can also be a disadvantage. The ability to make interest only payments means that if you lack financial discipline and you don’t put your own personal repayment plan in replace, you could find yourself with a larger balance than when you started. This can make it tough to switch lenders upon your mortgage renewal and get the best interest rates (since you might not be able to pass the stress test).

Tougher to Qualify for

Home equity loans are tougher to qualify for today than they used to be. Not only are you required to pass the mortgage stress test (2% + your HELOC rate), some lenders are choosing to be more conservative and qualify you based on the limit of your home equity loan instead of your current outstanding balance. If you already have a lot of debt at the moment, you may have a tough time qualifying.

Higher Interest Rates than a Mortgage

Although the interest rates on home equity loans are almost always cheaper relative to other forms of unsecured debt, it’s important not to lose sight that home equity rates are typically higher than mortgage rates. As such, if you borrow a substantial amount of money and you don’t plan to borrow anymore, you might be better of converting your loan to a mortgage and paying a lower interest rate.

Likewise, the interest rates charged on home equity loans are typically tied to your lender’s prime rate. (Prime rate is the interest rate offered to a lender’s most creditworthy and trusted customers.) As such, you’re leaving yourself exposed if interest rates go up a lot over a short period of time.

Canada.ca Video: Is a Home Equity Line of Credit right for you?

By the Numbers

About 2.15 million Canadians had a home equity loan in 2014 with an average outstanding balance of $57K. (source: www.cbc.ca)

Home Equity Loans by the Numbers

What to Look Out For in a Home Equity Loan

Interest rate
Find out the best interest rate a lender will offer you. The interest rate lenders offer is based on several factors, including your credit score and the home equity loan credit limit. The better your credit score, the better the interest rate you should be able to qualify for. Likewise, the higher your home equity loan credit limit, the better your interest rate tends to be. A home equity loan interest rate of prime + 0.5% or 1% is considered decent, although if you’re lucky some lenders offer home equity loans at prime rate.
Set up costs
It’s important to recognize that there may be costs involved in setting up home equity loans. Costs typically include appraisal fee and legal costs. Your lender may cover them, but oftentimes you’re responsible for them. It can add up to $1,000 or more in additional costs in some cases.
Switching Costs
When your mortgage comes up for renewal, a home equity loan will make it tougher to shop around. That’s because your mortgage is registered with a collateral charge. Only certain lenders will be able to accept your mortgage and you may be required to pay a higher interest rate.
Besides higher interest costs, there might be switching costs, including higher legal costs than you’d otherwise pay when switching a mortgage with a standard charge.

About the Author:

Sean Cooper is the bestselling author of the book, “Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians”. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. Sean is a personal finance journalist, money coach and speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense.

Home Equity Loan Frequently Asked Questions

How do you get a home equity loan?

The first step is deciding which loan you should get. Once you have decided on a lender you will have a few steps to follow.

First, the lender will want to assess you. To do so they will pull your credit score and they will likely require a home appraisal. This will help them determine the value of your property and your total equity. After that, they will consider your approval based on your income, credit score, equity, and debt-to-income ratio.

Once you’re accepted, you will have to make a 20% down payment for the loan. From that point on, you will have to make payments as per the terms laid out in your agreement.

If you plan on using a home equity loan as a substitute for a mortgage, you will have to make a down payment of 35%. This means that choosing this path will grant you more flexibility, but you will have to spend more money upfront.

What are the eligibility requirements for a home equity loan?

First, you will need a credit score that the lender deems appropriate. Your credit score will be the lender’s first consideration.

Second, you will need proof that you have a stable income that is high enough to handle repayments. Lenders will want to see stability and they will compare your income to the value of the loan.

Third, home equity lenders will want to compare your income-debt ratio. If you are too bogged down by debt, they will consider rejecting you. Your debt-income ratio should be below 40%.

In some cases, you will need:

  • Proof of ownership of your home
  • Mortgage details
  • A home appraisal

How much can you borrow on a home equity loan?

A home equity loan is usually a one-time payment of up to 80% of the value of your home. You will pay interest on the entirety of the loan. If the value of your home has not been determined, you will need a professional appraisal. The value of your home is critical to lenders.

What are the different types of home equity loans?

There are three types of home equity loans in Canada.

Second Mortgage

If a potential home equity loan is second position, it can be considered a second mortgage. A home that is already mortgaged can also take a second mortgage. This equity loan would be in the second position, meaning that if you have a foreclosure, the primary mortgage will be paid out first. Because the second mortgage assumes far more risk, the rates are typically higher.

Home Equity Line Of Credit

A home equity line of credit (HELOC) is like a second mortgage, except it works like any other line of credit. Instead of one large lump payment, you will be given a pool of credit. You can take funds from your HELOC when you need them, and you only pay interest on the funds you use.

Reverse Mortgage

A reverse mortgage is a home equity loan option available to Canadian homeowners aged 55 or older. These home equity loans will see your lender making monthly payments to you. In many cases, they may just send one lump sum. In exchange, the lender receives equity in your home.

What’s the Difference Between Home Equity Loans and Lines of Credit (HELOCs)?

A HELOC is a less restrictive home equity financing option. Instead of paying back a lump sum of money given to you immediately, you choose when you can draw funds and how much you draw. When you draw funds, you will have to make repayments over time like you would have to with another loan. A HELOC requires a minimum down payment of 20% of your home’s equity.

A loan on house equity is simpler and more straightforward. They also carry fewer requirements, making them a good option if you have a low credit score or can’t prove a consistent income.

What are the current average home equity loan rates in Canada?

Canadian home equity loan interest rates vary by lender and are constantly changing. The rates you can get from banks range from about 4.5% to 5%. Alternative lenders usually charge between 6% and 11%. With banks, you will likely be rejected if your credit score is low. If your credit score is excellent, you will have access to the widest variety of lenders who will offer you their best rates.

Can I get a home equity loan with bad credit?

It may be harder to get approval when you have bad credit. However, many alternative lenders regularly work with homeowners who have a bad credit score.

Just be aware that you have fewer options when your credit score is low. The lenders that will still offer home loans will offer higher interest rates than they would offer a potential borrower with good credit.

Can I use my home equity to buy another home in Canada?

Yes, you can use your home equity to buy another home. This is, in fact, a low-cost and convenient option. Because you are using top-notch collateral (property) by default, you will have access to much better interest rates than you would with other types of loans.

While this is a great way to buy another home, it does have its drawbacks. Tying up your equity funds in another asset that’s difficult to liquidate has its own risks. If you need to liquidate your equity in an emergency, you will have difficulty doing so.

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