If you’re a first-time homeowner and have only just purchased your property in the past few years, you may still be getting used to all the responsibilities and opportunities that come with owning your own house. You’re also probably working hard to pay down your mortgage, and looking forward to the day when you will own the property outright.
For most Canadians who have bought a house or condo, a mortgage is not only an expense but an investment on an asset. And when Canadian homeowners find themselves in need of money to consolidate debt, this asset can be their lifeline: thanks to home equity loans, it is possible to borrow against the value that has already accrued. But what is a home equity loan and how is it different from a mortgage?
This article will explore the main differences between a home equity loan and similar financial tools like refinancing, and explain how home equity loans work, what they can be used for, and who is eligible to apply for them. We will also discuss the best ways to get a home equity loan in Ontario if you have a low credit score.
Home Equity Loan vs. Mortgage
A mortgage is essentially a loan that an individual or couple takes out to purchase a home or other property. Because homes are so expensive, most Canadian mortgages are designed to be paid off over the course of 25-30 years. At the beginning, most of the money you pay toward your mortgage will be eaten up by interest, but as time goes on you’ll make more and more of a dent in the principle — meaning that you own a greater percentage of the property as a whole.
Homeowners who have been paying off their mortgage for a decade, could be sitting on a considerable amount of equity that they own outright, even if the initial mortgage loan is still outstanding. And for those who own properties in hot real estate markets like Ottawa or the Greater Toronto Area, this is compounded by the fact that the house itself may be worth significantly more than when it was first purchased.
A home equity loan essentially gives homeowners a way of borrowing off this equity, making it possible to secure much-needed cash from a third-party lender.
How Do Home Equity Loans Work?
The essential mechanics of a home equity loan are simple: the homeowner approaches a lender (such as a bank) or brokerage and enters into an agreement to borrow a certain amount against the value of their home. How much is available will depend on how much of the mortgage is paid off, but in some cases, it may be possible to borrow as much as 85% of the home’s total value.
One thing that makes a home equity loan different from mortgage refinancing options is that this loan does not replace the initial mortgage — it is a secondary loan, and in the case of a default the lender will come second to the holder of the mortgage in terms of payout. This increases the risk for the party providing the home equity loan, which can impact the interest rate.
However, because the homeowner is still borrowing against an asset, the interest is likely to be substantially less than an unsecured loan, making it an attractive alternative for those who want to leverage the value of their homes to pay off higher-interest debts.
What Can You Do with a Home Equity Loan?
Home equity loans can be used for a number of purposes, but most homeowners get a home equity loan to consolidate other types of debt or to finance renovations or expansions of their property.
For example, if you are carrying large amounts of unsecured debt and are having a hard time meeting your monthly payments, taking out a lump sum at a much lower interest rate and using that money to consolidate a series of obligations into a single payment can be the fastest way to get out of debt completely.
Alternatively, if you are facing emergency repairs and simply cannot afford to put them on a line of credit, a home equity loan can help you fix your roof or repair your plumbing system without having to put it on a credit card.
Either way, home equity is one of the fastest avenues for putting yourself on a more stable financial footing.
Who Can Apply for a Home Equity Loan?
If you own a home, you can apply online for a home equity loan from Burke Financial in minutes. We are an experienced alternative mortgage brokerage that works to connect clients with lenders who can provide them with the resources they need.
As a brokerage, we do not lend money ourselves, but rather connect you with lenders who can provide you with competitive home equity loan rates so that you can put the equity you’ve built up over the years to work.
Unlike other financial institutions, we don’t require that our clients have a minimum credit rating or a regular income — no matter what situation you are in, we can work to find subprime mortgage lenders who are willing to assume the risk of your loan.
Over the past year, the coronavirus pandemic and its attendant economic shock have exacerbated the already serious crisis of unsecured debt that many Canadians were already living with. Through no fault of their own, many Canadians are starting 2021 juggling numerous debts and struggling to meet their monthly expenses.
If you are looking for ways to meet your debt obligations or have emergency expenses that need to be covered, a home equity loan is one of the most reliable financial tools available to you. Get in touch with Burke Financial today to find out how we can help you secure a home equity loan today.