If you need extra funds for a financial emergency or home improvements, a home equity loan may be a good solution. In this blog, we'll break down everything you need to know about home equity loans so you can figure out whether it's the right option for you.
Home equity loan defined
A home equity loan allows Canadian homeowners to borrow money using the equity built up on a house as collateral. Usually coming in the form of a home equity line of credit (HELOC) or second mortgage, home equity loans can provide homeowners with additional access to funds which can be used to finance major expenses such as home improvements, debt consolidation, education expenses, or emergencies.
Home equity loans allow you to borrow up to 80% of your home's equity at a lower interest rate than other loans. You can use the funds for any reason, unlike a primary mortgage which can only be used to buy property.
What are the different types of home equity loans?
In Canada, there are two main types of home equity loans: a fixed-rate loan or a Home Equity Line of Credit (HELOC).
Fixed-rate loan
Fixed-rate loans provide borrowers with a lump sum of money that must be repaid over a set number of years, which can provide stability and predictability. With a fixed-rate loan, you'll know exactly what your interest rate and monthly payments will be for the life of the loan.
Home Equity Line of Credit
A HELOC can be a flexible option for Canadian homeowners who need access to funds. Similar to a credit card, a HELOC allows you to withdraw money up to a certain limit, depending on how much you need. You only pay interest on the amount borrowed, but keep in mind that the interest rate is typically variable and can fluctuate based on market conditions.
Thinking about getting a home equity loan in Canada? Here are a few things to consider:
Be prepared and shop different lenders
Getting a home equity loan follows the same process as getting a mortgage, so you'll need to qualify for the loan before you can get the money. First, you'll want to check your credit score to make sure you're eligible. Once you're in the clear, it's time to do your research to find the best lender and loan terms that work for you.
Consider the terms and your financial situation
Home equity loans allow you to borrow money based on the amount of equity you have in your home, and typically require at least 20% equity in the home to qualify. As this is additional debt that needs to be repaid every month, make sure you understand how this loan can impact your overall financial situation, and take the time to consider the interest rates, repayment terms, fees, and the potential risks of using your home as collateral.
Whether you're focused on getting a home equity loan or are simply curious about the process, we've got you covered. At Homewise, our team of mortgage advisors is dedicated to helping you navigate this information so you can make a decision that best suits your needs. Applying online takes just five minutes.
