Home Equity Loan in Canada

With housing prices rising across most of the country, Home equity loans allow Canadian homeowners to access the wealth in their properties for major expenses or financial goals.

In this extensive guide, we’ll explore everything you need to know about home equity loans in Canada for 2024.

What is a Home Equity Loan?

A home equity loan is a type of loan secured against the equity in your home. Equity represents the current market value of your property, less any outstanding mortgage debts.

With a home equity loan, you can take out your home equity – up to 80% in some cases – while keeping ownership of your home. The loan provides a lump sum of cash, which you repay over a set period at a fixed or variable rate.

Pros and Cons of Home Equity Loans

Pros	Cons
Access large lump sums of cash, often tens of thousands of dollars.	Home used as collateral – Risk of foreclosure
Lower interest rates than unsecured debt	Higher rates than first mortgages
Predictable payments with fixed rates	Lengthy application process
Interest may be tax deductible	Upfront costs like appraisal fees
Build credit history	Variable rates may increase payments

How Does a Home Equity Loan Work in Canada?

Getting approved for a home equity loan in Canada follows a similar process as applying for a first mortgage:

Step 1: Determine your home’s current market value with a professional appraisal. Online estimators can also give you an idea.

Step 2: Calculate your available equity by subtracting any outstanding mortgage balances from the appraised value.

Step 3: Apply for a home equity loan and submit documents to prove your income, assets, debts, and credit score.

Step 4: If approved, you’ll receive the loan amount as a lump sum payment deposited into your bank account.

Step 5: Make monthly payments on your existing mortgage and the new home equity loan over the repayment term.

While home equity loan rates are generally lower than other consumer debts, they tend to be higher than first mortgage rates. That’s because lenders view them as riskier than first-position mortgages.

If you default, the first mortgage gets paid back in foreclosure. The higher interest rate on a home equity loan compensates the lender for this additional risk.

How Much Home Equity Loan Can You Get?

Most lenders will approve home equity loans up to 80% of your home’s appraisal value.

For example:

• Your home is worth $500,000
• $500,000 x 80% = $400,000
• So you could qualify for up to a $200,000 home equity loan

In some cases, lenders may approve amounts up to 85%. But the more you borrow compared to your equity, the higher the interest rate you’ll pay.

Aim to find the optimal balance between maximizing your loan amount and keeping the rate affordable. Online home equity calculators can help determine this sweet spot.

Are You Qualified for a Home Equity Loan?

Here are 6 typical requirements to qualify for a home equity loan in Canada:

• Credit score – Most lenders look for scores of 680 or higher. The better your score, the lower your rate.
• Debt-to-Income (DTI) Ratio – Your monthly debt payments, including the new loan, should be less than 40% of your gross monthly income.
• Employment – At least 2 years at your current job or in the same field.
• Home Equity – At least 15-20% equity is ideal. The more equity you have, the better.
• Income – Stable income from employment, retirement, or other assets. Self-employed borrowers may need 2 years of tax returns.
• Appraisal and Legal Fees – The appraisal fee is $300 to $500, and the legal fees are $300 to $800.

Always compare rates and terms from multiple Canadian lenders to find the best home equity loan option for your situation.

5 Common Uses for Home Equity Loan

Here are the five most popular reasons Canadians tap into their equity:

Consolidate Higher Interest Debt

If you have accumulated balances on credit cards, payday loans, or personal loans with high double-digit interest rates, a home equity loan allows you to consolidate these debts under one lower fixed rate. This can reduce your monthly payments and total interest costs over time. The key is to avoid building those balances back up after consolidating them.

Finance Home Renovations

Major home upgrades, such as kitchen overhauls, basement finishes, and additions, can increase property value. A home equity loan is an affordable way to fund these expensive projects, especially if you plan to stay in your home long-term to benefit from the improvements.

Pay Emergency Expenses

A sudden job loss, health crisis, or other unexpected life event can strain your finances. Accessing cash through a home equity loan or line of credit provides funds to help you through periods of financial hardship.

Avoid Foreclosure

If you need to catch up on mortgage or tax payments and face the risk of foreclosure, a timely home equity loan can provide the funds you need to bring your accounts current. This allows you to avoid foreclosure and the substantial damage it causes to credit profiles.

Access Retirement Funds

Rather than liquidating retirement accounts like RRSPs or TFSAs and incurring major withdrawal penalties, a home equity loan lets you tap funds using your equity as collateral while keeping your savings intact.

Always weigh the costs versus benefits and plan a repayment before using equity. Don’t borrow more than you need.

Can I Get a Home Equity Loans With Poor Credit?

Traditional lenders are strict regarding credit scores, debt levels, and income when approving home equity loans. But, alternative mortgage lenders take a more practical approach, focusing mainly on your equity.

Here are 5 tips to improve your chances:

• Compare rates from alternative/private lenders emphasizing equity over credit scores or income.
• Consider credit unions, which offer more flexibility than significant banks.
• Ask co-signers with better credit to apply alongside you.
• Start with smaller loan amounts to establish your ability to handle the payments.
• Pay down existing debts and resolve any issues on your credit reports to improve your profile.

The critical advantage of home equity loans is the funds are secured by your property rather than your credit or employment qualifications. By highlighting this collateral aspect, borrowers with bruised credit or fluctuating incomes can still receive approvals.

Lender Options for Bad Credit Applicants

If your bank has turned you down for a home equity loan, here are 4 types of alternative lenders to consider:

Online Lenders

Online lenders provide home equity loans entirely through digital applications and automated processes, which results in faster approvals and funding than traditional lenders. While credit scores are considered, many online lenders emphasize equity and property value more.

Mortgage Brokers

An experienced broker understands the wider market of lenders and their criteria. They can match you with lenders concentrating on your equity stake rather than credit or income qualifications. Brokers may get you better rates by shopping your profile to multiple lenders.

Credit Unions

Local credit unions often have more flexibility than Big banks in approving home equity loans for members with credit challenges or unconventional employment. They take a more personal approach to understanding members’ financial situations.

Private Mortgage Lenders

Private lenders provide home equity loans using their capital rather than depositor funds. This allows them to design loan programs specific to the equity asset, with less emphasis on standard credit scores, income, and employment requirements.

Always compare multiple lender options to find the best rates, terms, fees, and qualification criteria for your situation.

Alternative Ways to Access Home Equity

Aside from home equity loans and HELOCs, here are 4 other options homeowners can use to leverage their equity:

Options	Loan details
Cash-out refinance	Refinance your mortgage for more than you currently owe and receive the difference in cash.
Reverse mortgage	For Canadians over 55, reverse mortgages allow you to draw equity without repayments. The loan is repaid when you sell the home or pass away.
HELOC	A HELOC works similarly to a credit card or personal line of credit. You can be approved for a revolving credit limit of up to 65% of your home’s value.
Unsecured personal loan	Personal loans offer fixed rates for borrowers with excellent credit without using your home as collateral.

Always compare the rates, fees, risks and repayment terms before choosing the best way to access your home’s equity.

Home Equity Loan vs HELOC

While both allow you to borrow against home equity, there are key differences between Home equity loans and HELOCs:

Factor	Home Equity Loan	HELOC
Loan amount	Fixed lump sum	Revolving credit line up to limit
Interest rate	Fixed-rate	Variable rate
Monthly payments	Principal + interest	Interest-only during the draw period
Best uses	Major projects, debt consolidation	Ongoing access to funds

With a home equity loan, you receive the full amount upfront, while a HELOC lets you access smaller amounts as needed. Consider both options to determine the better match based on your borrowing needs and current financial situation.

Will a Home Equity Loan Affect Your Credit?

Responsibly managing a home equity loan or HELOC can help build your credit in 4 ways:

• Payment history – Making consistent on-time payments shows lenders you can handle debt responsibly. This factor holds significant weight in credit scores.
• Credit mix – Credit reports score better when you have a mix of loan types, including installment (fixed payments) and revolving credit (lines of credit). Home equity products help diversify your mix.
• Credit utilization – Keeping account balances below 30% of available limits helps your credit utilization ratio. Home equity loans provide access to funds while letting you avoid maxing out cards.
• Account history – A long history of active installment loan accounts demonstrates stability and experience managing large loans.

While defaults or foreclosures will damage your credit, properly managing a new home equity loan or HELOC product demonstrates fiscal responsibility and can strengthen your credit profile over time.

Comparing Home Equity Loan Offers

When researching lenders for a home equity loan, here are 5 key factors to compare:

Interest rates – Rates can vary significantly between lenders. Even a slight rate difference of 0.5% on a large loan will impact your total interest costs over the lengthy repayment period of up to 30 years.

Origination fees – Upfront fees like application, processing, underwriting, and appraisal fees range from 0% to 5% of the loan amount. Always check if the advertised rate factors in fees.

Prepayment options – Many lenders allow you to double payments or pay off your loan early to reduce your total interest. But some charge prepayment penalties if you pay off the loan too fast.

Loan terms – While 30-year terms are most common, shorter terms of 5, 10 or 15 years reduce your total interest paid but mean higher monthly payments.

Flexibility – Online lenders often offer faster approvals and funding but less flexibility on rates and fees. Mortgage brokers may negotiate better deals but charge higher commissions.

Is Now a Good Time for a Home Equity Loan in Canada?

With housing markets hitting new highs recently, many Canadian homeowners have seen their equity reach record levels. Now is an opportune time to consider tapping into this equity through a loan against their property’s increased value.

If you need significant funds for high-priority expenses like debt consolidation, home repairs, and emergency costs, the long-term savings from repaying at a lower fixed rate can still outweigh short-term rate increases.

But for less pressing needs, it may be prudent to wait and see if rates trend downward at any point before tapping into your home equity. Monitor rate forecasts and talk to a mortgage broker to determine the optimal timing for your situation.

Is a Home Equity Loan Right for You?

While advantageous in many ways, home equity loans do come with risks. Before applying, make sure you take these 7 steps:

• Review your budget to ensure you can handle the high fixed monthly payments for up to 30 years. Account for future rate increases on variable HELOCs.
• Check your credit report and score. Take time to improve your profile before applying if needed.
• Research current home values to calculate your estimated equity and maximum loan eligibility.
• Compare rates from alternate lenders, not just banks, to find the best loan program for your needs.
• Have a clear plan for using the funds and repaying the loan. Avoid borrowing more than necessary.
• Seek advice from a mortgage broker or advisor regarding alternatives like refinancing your primary mortgage.
• Discuss any tax deductibility of interest for home renovations with your accountant.

Home equity loans allow Canadian homeowners to leverage their property’s equity to generate lump sum funds for significant expenses, debt consolidation, renovations, and other costs. However, they risk your property and financial security if used irresponsibly.

Weigh the benefits and alternatives carefully before deciding if tapping your home equity aligns with your overall financial objectives. Work with a broker at Best Mortgage Online to find the best loan program for your needs.

FAQs

Article Sources

1. Home Equity Loan Canada
2. What Is a Home Equity Loan?
3. Understanding Home Equity Loan and Mortgage Options in Canada