*This post was created in collaboration with Alpine Credits
There are many perks to being a homeowner, but one of the biggest benefits is the equity you build in your home. When you have a lot of home equity, you can tap into it to finance various expenses. That particular expense might be anything from a large addition to your house, paying off your existing car loan, or paying for your child’s tuition. Whatever that cost might be, you can pay it down with a home equity loan in Canada.
How To Borrow Using Your Home Equity?
There are a few different ways you can tap into your home equity. In general, when you take out a loan using the equity in your home, it’s considered a second mortgage. There are two types of second mortgage loans: home equity loans and home equity lines of credit (HELOCs).
These loans are considered second mortgages because a loan is taken out against your property that is already in the midst of being mortgaged. That means if you default on the loan, the lender has the right to foreclose on the house and sell it to recuperate their loss.
Home Equity Loan In Canada
A home equity loan is a loan that uses your house as collateral. With a home equity loan, you can usually borrow a maximum of 80% of the property’s appraised value, minus what you have left to pay on your original mortgage.
You’ll be charged interest and have fixed installment payments.
How Can I Get One?
To get a home equity loan you need to own a house with equity in it. In general, to qualify for a home equity loan you’ll need:
- To have your home appraised by your lender
- At least 20% equity in your home
- A high enough income to support the payments and a debt-to-income that shows you have enough funds to make payments including your current bills and debts.
- A good credit score
HELOC (Home Equity Line Of Credit)
There are a few notable differences between a home equity loan and a home equity line of credit. The first difference is that a HELOC is a line of revolving credit, as opposed to a loan, which is one large sum of money. Because of this, you can use that line of credit at your leisure and regain access to the full limit as you pay off the balance.
With most lenders, you can borrow up to 65%-80% of your property’s appraised value. However, the HELOC plus outstanding mortgage should equal less than 80% of their home value. Once your line of credit is secured, you can borrow from it as you wish, as long as you keep up with the minimum monthly payments.
How Can I Get One?
You’ll be able to open a line of credit through your bank or private mortgage lenders. However, banks will typically require a high credit score in order for you to qualify.
Potential borrowers must first have their property appraised to make sure they have enough home equity to qualify for a HELOC.
Can You Get A HELOC Or Home Equity Loan In Canada With Bad Credit?
Home equity loans and HELOCs are generally easier to secure because they’re secured by your home. However, qualifying with big banks can still be difficult if you have bad credit.
Fortunately, there are alternative lenders, like Alpine Credits, that make it easy for bad credit borrowers to secure a home equity loan or HELOC. If you own your home, you can tap into your equity through a home equity loan from Alpine Credits in less than 24 hours. Simply apply online to get a no-obligation quote and find out how much you can qualify for.
Applying with Alpine Credits won’t have any negative effect on your credit score. And unlike conventional lenders, approvals with Alpine Credits are based on your home’s equity, not your income or credit profile.
Can A Home Equity Loan In Canada Affect Your Credit?
Your credit score can be affected by many factors, including credit history (average age of your credit accounts). Having a few old accounts is generally good for your credit because it increases the average age of your credit accounts. But when you add a new credit account to the mix, you’re effectively reducing the average age of your credit history, which may negatively affect your credit.
Your payment history is generally an important factor used in calculating your credit scores. As such, missed payments on your home equity loan in Canada may also affect your credit negatively.
Can You Pay A Off A Home Equity Loan In Canada Early?
If you’ve received a raise at work or happened upon a financial windfall, you may have more money available to pay off your loan early. This can save you a great deal in interest charges over the loan term.
That said, there may be fees associated with early loan repayment that you should find out about first. Lenders often charge early repayment penalty fees, which can cost thousands of dollars. In this case, the extra charges may cancel out any potential interest savings by paying your home equity loan off early. So make sure you crunch the numbers before making a decision.
How Do I Know How Much Equity I Have In My Home?
If you’ve been paying off your mortgage for several years, then you likely have at least some home equity. Generally, you’re likely to have some equity in your home if:
- You’ve paid a significant amount of your mortgage
- Your home value increased
- You’ve renovated your home (in a way that added value)
If you’re curious about how much equity you have, here’s how to do a quick estimate.
| Current Home Value | $376,000 |
| Outstanding Mortgage | $200,000 |
| Home Equity | $176,000 ($376,000 – $200,000) |
How Much Can You Borrow? HELOC vs Home Equity Loan In Canada
In Canada, lenders typically allow homeowners to borrow up to 80% of their home’s value on a home equity loan, less any outstanding balance on their first mortgage. For HELOCs, you can borrow up to 65% to 80% of the value of your home.
HELOC
Let’s say your lender allows you to borrow up to 65% – 80% of your home’s equity for a HELOC minus the outstanding mortgage balance.
Assuming you can borrow up to 65% and you have a home worth $500,000 and an outstanding balance of $300,000, you’d be able to borrow:
| Home Value | $500,000 |
| Maximum Amount You Can Borrow (65%) | $325,000 ($500,000 x 65%) |
| Outstanding Mortgage | $300,000 |
| Total Amount You Can Borrow | $25,000 ($325,000 – $300,000) |
Home Equity Loan In Canada
With a home equity loan you can usually borrow up to 80% of your home’s appraised value, minus the balance of your mortgage.
To illustrate how much you can borrow on a home equity loan, let’s say your home is currently worth $500,00 and you still owe $300,000 on your mortgage. If your lender allows you to borrow 80% of the equity in your home, the equation to determine the most you can borrow is as follows:
| Home Value | $500,000 |
| Maximum Amount You Can Borrow (80%) | $400,000 ($500,000 x 80%) |
| Outstanding Mortgage | $300,000 |
| Total Amount You Can Borrow | $100,000 ($400,000 – $300,000) |
Advantages Of Using Your Home Equity
- Strengthen your home’s value – Since your home is an asset, you can use your equity to finance any renovations you might want to do. Thus increasing your home’s market value, if and when you decide to sell it.
- Can be more affordable – Using your equity to access a loan provides added security for the lender. This type of financing can be more affordable than personal loans or unsecured lines of credit. Making it a great option for financing a large project.
- Use the money for anything you want – While some homeowners choose to use their home equity loan for renovations or to finance other properties. Others will use it to pay for their children’s or their own education, or even go on vacation. You can also use your equity to consolidate any higher-interest debts you might have on your plate.
Disadvantages Of Using Your Home Equity
- Various fees to cover – There are a number of costs that you have to pay before you are allowed access to it. For example, fees for the appraisal, the application, and legal documents.
- Variable rates = variable interest costs – You might choose to borrow at a variable rate because initially, the rate might be cheaper than that of the fixed-rate option. However, be aware that if you choose a variable rate your interest rate can change.
- Putting your house at risk – Defaulting on your payments can lead to your home being foreclosed. So, before taking out a second mortgage, you need to be absolutely certain you’ll be able to make regular payments.
Watch mortgage broker Dave Johnson explain each of the different methods you can use to access your home equity.
Other Ways To Access Your Home Equity
Having equity in your home opens up plenty of financing opportunities. In addition to a HELOC or home equity loan, there are a couple of other ways to access your equity:
Cash Out Refinancing
A cash-out refinance refers to refinancing your existing mortgage to a new mortgage for a larger amount. Essentially, you are taking out a new, bigger loan to pay off your old loan, and the difference between the two loan amounts can then be cashed out. This allows you to convert your home equity into cash, which you can then use to cover a variety of expenses.
Keep in mind that a cash-out refinance will increase your mortgage balance since you’re taking out a bigger loan amount.
Reverse Mortgage
A reverse mortgage is a unique type of home equity loan that is available to homeowners aged 55 and older. Many Canadians who apply for a reverse mortgage do so to help fund their retirement if their pensions aren’t adequate enough to keep them comfortable throughout their golden years.
With a reverse mortgage, you can borrow up to 55% of your home’s value. You can receive the funds in one lump sum or in regular installments, and no loan payments are required unless you sell your home or pass away. If you sell your home, you’ll need to pay the loan back in full, and if you die, the proceeds of the sale of your home will be used to pay off the loan.
Additional Reading
How Will You Use Your Home Equity Loan In Canada?
In the end, the way you decide to access and use your home equity is up to you. Whatever path you choose should be based on your financial situation, so don’t make that choice until you’ve got all the advice you can and weigh all your options equally. If you’re having trouble figuring out which solution will suit your needs best. Speaking with a mortgage expert like Alpine Credits is a good first step.
Home Equity FAQs
What does it mean to refinance your mortgage?
Is it worth applying for a home equity loan?
What happens if I fail to pay off my home equity loan?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
