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For most Canadian homeowners, borrowing against their home equity is one of the best ways to secure a substantial loan at 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 authoritative ranking 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 home equity loan request.
We can help connect you with the home equity loan providers in Canada.
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 home equity 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 using a home equity loan? 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.
About 2.15 million Canadians had a home equity loan in 2014 with an average outstanding balance of $57K. (source: www.cbc.ca)
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.
The first step in getting a home equity loan 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.
You only need to apply for a home equity loan and be approved once. To do so, you will need to meet the requirements of whichever lender you go to.
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:
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.
There are three types of home equity loans in Canada.
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.
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.
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.
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.
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.
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 equity loans will offer higher interest rates than they would offer a potential borrower with good credit.
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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