What is a Home Equity Loan?

Thinking about a home equity loan? This article provides a quick primer on what they are, how they are used,and their most important characteristics.

Home equity loans are becoming more common in Canada - a result of tightening lending restrictions and rising equity, especially in areas of British Columbia, such as the Greater Vancouver Area.

But what is a home equity loan? What is a home equity loan used for? Who uses them? This article provides a quick explanation...

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home equity loan Canada

Home Equity Loans Explained

A home equity loan is simply a loan backed by residential equity. Essentially, it's a mortgage, typically in second place (second mortgage).

According to this broad definition, your mortgage with your bank is considered a home equity loan. However, for our purposes, we will narrow it down to refer to second mortgages issued by private lenders, such as ourselves.

Loans are typically interest-only and short-term (6-12 months). They are designed to be transitioned to a re-financed mortgage or similar product as soon as possible.

Characteristics of a Home Equity Loan

  • Interest rates start at 5.95%
  • Loan to values (LTV) up to 80% (this means that your total debt can go up to 80% of the value of your home)
  • Loans start at $25,000 and go up to $2 million

Advantages of a Home Equity Loan

The cheapest financing you can get will always be secured - loans backed by an asset. The cheapest secured loans you can get will always be backed by residential equity (HELOCs and mortgages).

The cheapest mortgage financing you can get will be through a traditional bank. If this is possible, it should pursued. This will always be our main goal for you and we will place you with a bank loan immediately if possible.

Failing that, however, a home equity loan is your best bet for a few reasons:

  • Home equity loans offer short-term financing (6-12 months)
  • Home equity loans are interest only, allowing you to adjust your payments according to your needs and situation
  • Home equity loans offer lower interest rates than unsecured debt

Still not convinced? Click here for a longer list that goes into more detail

Uses of a Home Equity Loan

Typically, money from a home equity loan in Canada is fungible - they can be used just about any way you like. That being said, there are a few uses that are much more common that othersL

For a more in-depth discussion on these uses, click here

Typical Clients Looking for a Home Equity Loan

Home equity loans are designed for homeowners that are not able to obtain mortgage financing from traditional banks. People looking for home equity loans are diverse and numerous, so this list is not meant to be conclusive. That being said, there are some broad categories:

  • Self-Employed - Self-employed persons have had an increasingly difficult time obtaining mortgage financing as of late thanks to a series of rule changes by CMHC. click here for more info
  • Poor Credit - Individuals with low credit scores can have difficulty when dealing with big banks in Canada. Home equity loans use your equity as the largest determinant, making them ideal for individuals with credit problems
  • Persons with back taxes due - Many lenders will not provide funds when you owe money to CRA, even if you intend to use the funds to immediately pay your taxes. Home equity loans are a great way to pay your back taxes. [click here] for more info
  • Not Income Qualified - This can be for a number of reasons but, like those with poor credit, persons that are not income qualified may be better suited for a home equity loan

Want to Know More?

If you have any specific questions, we would love to speak with you. You can easily book a phone call with one of our experts to discuss your options

home equity loan consultation

How to Apply for a Home Equity Loan

Applying for a home equity loan is quick and easy. You are under no obligation and all of your information is strictly confidential.

You can apply for a home equity loan here

home equity loan application