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...
Table of Contents
- Home equity loans explained
- Characteristics of a home equity laon?
- Advantages of home equity laons
- Typical uses of a home equity loan
- Typical clients using home equity loans
- Want to know more?
- How to apply for a home equity loan
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.
- 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
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
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
- Debt consolidation
- Home renovations
- Credit repair
- Small business loan
- Paying off back taxes
For a more in-depth discussion on these uses, click here
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
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
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