A home equity loan is a loan that is secured by the available unencumbered equity in a borrower’s primary home, second home, vacation home, or any residential property that they own.
Home equity loans come in different forms or borrowing products. These types of loans are available in the form of a first mortgages, second mortgage , third mortgage, or a HELOC (home equity line of credit), or a refinance on a property that is mortgage-free. When applying for a home equity loan, you can apply with major banks, monoline mortgage lenders, credit unions, trust companies, private mortgage lenders, and any lender that would typically offer mortgage products and services. For the most part though, when someone says that they are looking for a home equity loan, they are usually referring to secondary or tertiary funding that is in addition to their existing first mortgage or second mortgage.
Most commonly, someone looking for a home equity loan is usually looking to take out cash money from the equity they have available in their home, rental property, cottage, etc. It’s common for a borrower who is looking for a home equity loan option to use these funds for reasons such as consolidating credit card and other debts, investing in another property, paying tax arrears of judgements, alleviating cashflow challenges, paying for tuition, paying for education loans, financing your travel plans, and more.
These funds that are being loaned out to the borrower are secured by the available equity in the owned home. For the most part, home equity loans are usually in second position behind an existing first mortgage, or even third position behind an existing second mortgage and first mortgage. As a result, the lender or lenders, investor or investors, and in some cases non-banking institutions who are lending their money take on a greater risk than the first mortgage lender does. Because of the increased risk to the lenders, these types of home equity loans tend to come with higher fixed and variable interest rates and additional fees. This is one of the ways that private lenders justify the added risk factor they need to account for, since they are in the business of making money on riskier investments.
Since the home equity loan borrowing process follows more of an asset-based lending approach than a traditional first mortgage from a bank or other institutional lender, applying for home equity loans does tend to be a much quicker and simpler application process. With the exception to home equity lines of credit, also known as a HELOC and credit lines, and home equity loans that are funded by institutional lenders, private mortgage lenders and individual investors primarily use their own personal funds when funding one of these types of mortgages. The main factors that a will affect a private lender’s decision when reviewing the application would include the current property value, the percent and amount of equity that will be remaining unencumbered after the requested loan amount will be funded (LTV or loan to value), where the home is located, and the property’s overall condition.
Contrary to some beliefs, you can even get a home equity loan shortly after you purchase and close on the purchase of the home. Some people believe that you need to wait at least six months to one year after you purchase a new property before applying for a HELOC or second mortgage loan, but that’s not the case.
When looking at home equity loans in Ontario specifically, it is important to note that a home in certain larger cities such as Toronto, Mississauga, Oakville, Burlington, Milton, Barrie, Newmarket, Vaughan, Markham, Scarborough, Ajax, Oshawa, Pickering, Aurora, Richmond Hill, Kitchener, Waterloo, Cambridge, London Ontario, Ottawa, and other major city centres can have specific advantages over a home in other more rural areas. Since the real estate markets are stronger, more desirable, and steady in these more heavily populated areas, a homeowner in these kinds of places will usually have access to private lenders who will allow their home equity loan to go up to a higher loan to value, or as we know it to be referred to as LTV.
In larger city centres or in suburbs located close to major cities in Ontario may have lenders who will go as high as 75% and even 80% loan to value in the case of a home equity loan Toronto. Niagara Falls and Grimsby are examples of other good developing real estate markets where homeowners would have access to a larger pool of equity based mortgage lenders when they undergo their search for the right option for home equity loans. As the most populated province in Canada, Ontario poses a very attractive market for private mortgages and private lenders to offer more competitive fixed rates and terms, and in some rarer cases variable rate options, than similar lenders in other real estate markets across Canada. Property values are less likely to go down in Ontario than they are in other provinces in Canada, and if they do, they will likely not go down at a fast rate or for too long. As a result, rates on mortgages and home equity loans can be lower too.
Due to the higher fixed interest rates that are common with many home equity loans and second mortgages. it is important that you make sure that you have a solid plan in place on how you will use, payback, and manage the new funds that will be made available to you. A good knowledgeable mortgage broker can really help you with this part of the equation. The right mortgage broker will work with you to thoroughly understand your current financial situation and future goals and search their lender lists to ensure that you are matched with the right lender who will give you the best home equity loan rates and terms that they have available to you.
In recent years, and given the not so new COVID-19 pandemic, people who own their home and new or seasoned business owners are increasingly turning to the equity that they have available in their home as a source of cash. They do this because during times when the business world is forced to close and people are forced to stay home on lockdown, income can be low while fixed expenses such as rent, property tax, personal income tax, credit card bills, and even certain variable expenses can remain virtually unchanged. It’s in these situations where those who own their home could benefit from professional advice and guidance from a trusted mortgage professional specializing in home mortgages. Reach out and contact a mortgage broker who can help you find the most suitable option for your and your family’s needs.
It’s important to understand how a new home equity loan can either help improve your financial situation, but also how it can cause harm to your finances if not managed properly. We will look at the pros and cons that can come with home equity loans and the home equity line of credit products.
Here’s a chart that showcases some of the best home equity loan rates in Ontario to help with your search.
Prime + 0.20*
|Canadian Western Bank (CWB Optimum)
Prime + 0.50*
|Home Equity Line of Credit
Prime + .60*
|Canadian Mortgages Inc (CMI)
|Home Equity Loan as a second mortgage
Prime + 4.00*
|HELOC in second position
|Home Equity Loan as a second mortgage
The amount of money that can be borrowed through a home equity loan depends on several factors. Some of these factors including the location of your property, the condition and age of your home, and the what the new LTV will be after the equity loan is funded. The loan to value takes into account all balances that will be owing on all mortgages and home lines of credit associated with the subject property once the new home loan is processed and the funds are issued to the borrower.
At Clover Mortgage we are able to broker home equity loans that range as low as $30,000 to as high as $100,000,000 and more, provided that the lender’s terms are satisfied and that there is enough equity remaining available in the home that is unencumbered after the home loan is given. Let’s face it, you are making a relatively large financial and life decision and need to know what your options are.
Our mortgage brokers will help you explore your options and different financial solutions, including the option to refinance your existing home mortgage at a better rate, and ensure you make the right financial choice for yourself and your home. Finding the right solutions to your financial needs is critical for building a better financial future full of the right financial resources you need to feel free.
To find out how much equity is available in your home you can use our home equity calculator .
One of the major benefits of a home equity loan and home refinance application and approval process can be quick and easy. In many cases the loan application can be approved within hours and in some cases the loan can be funded in as little as 48 hours if the borrower needs the cash quickly, in fact this type of home loan might be one of the best options and solutions available at the time.
In the case of a second mortgage, the term of this type of home equity loan is typically 1 year, whereas the term on a HELOC would be open for the most part. Both options can be seen as a benefit depending on how long of a term or short of a term you expect to require the access to funds.
Another key benefit is that when it comes to home equity loans funded by private lenders, the borrower’s credit score and income do not play as large of role in determining if the borrower can qualify for the loan or not. Although it may not be a critical factor to some private lenders, it is your mortgage broker's responsibility to ensure that they are satisfied by your income and feel confident that you are not likely to default on your mortgage. If you are looking for the best home equity loan rates then you would be required to have a minimum credit score and qualifying income to debt ratios, though it’s still is an easier process than getting a first mortgage from a bank most of the time.
One more advantage when getting the right home equity loan is that it can save you thousands and even tens of thousands of dollars if used as a debt consolidation tool to consolidate debts that have higher fixed rates. Credit cards, department store cards, home improvement store credit cards, tend to have interest rates that are significantly higher than the rates you could potentially get with a good new home equity loan.
Home equity loans usually have much lower interest rates than a credit card, home renovation store card, grocery or gas card, or department store card would. With the extra cashflow that you have left at the end of every month, you can use that to pay down the principal amount of your loan much faster than you would have otherwise paid off that credit card with a 20% interest rate. You don’t need a calculator to see that you’ll be saving significantly with a home equity loan at 6%, 7%, 8% or more.
Some of the potential disadvantage of home equity loans include higher interest rates when compared to more tradition loans secured again a borrower’s home. Since these types of loans come in second or third priority behind a first or second mortgage or home equity line of credit (also known as a home line), lenders of home equity loans charge a higher interest rate to make up for the added financial exposure their investment has.
Another disadvantage to a home equity loan is the additional lender fees, legal fees, and broker fees that come along with these types of loans that the borrower needs to account for. Once again due to the heightened financial risk to the lenders, they typically charge a lender fee that can range from as low as 0.5% to as high as 10% in some cases to help make up for some of that extra risk they take. Also, since in most home equity loan cases the lenders do not pay the brokers anything, or very little in a few cases, the mortgage broker will add a fee that can also range from as low as 0.5% and increase from there depending on the complexity of the loan and loan amount. It’s typical for the broker fee percent to decrease as the loan amount increases.
Below is a comparison chart of the pros and cons of a home equity loan.
|• Fast and easy application process
|• Higher interest rates than a first mortgage with a traditional banking institution lender
|• Quick approval and funding
|• Additional fees due on closing
|• Bad credit gets approved*
|• Can put the borrower into a worse financial situation without the proper planning and guidance
|• Homeowners get approved*
|• Low income can get approved*
|• Higher loan to value options available*
|• No minimum credit required*
|• Typically interest only fixed monthly payments
|• May help alleviate cashflow issues
|• May help improve your credit score
|• Can be used to help pay off debts faster
|• Can be a great option for consolidating other debts that carry higher rates and monthly payments
|• Can help pay back tax arrears
|• Can help stop power of sale proceedings
|• Better interest rates than most credit cards, online cards, department store card, home improvement store cards and other debt-based cards come with.
|• The term of this home loan is typically either a 1 year term in the case of a private mortgage, or an open term in the case of a HELCO
There aren’t many ways of getting a home equity loan in Ontario. These can either be obtained by going lender-direct or through a mortgage broker. Getting a home equity loan is often times a much easier and faster process than going through the more formal application process when you apply for a mortgage at a bank. This is because many home equity loans are funded by private lender. Since private lenders care primarily about earning a higher return on their investment, they are more willing to take higher risks as long as they get compensated through elevated interest rates and additional fees. As a result, they place less weight on the the applicant’s credit history, income, debts and balances on credit cards, and so on. Having said that, your broker needs to verify that your income will be enough to cover your mortgage payments and that they are not putting you in a worse situation or extend the inevitable.
Private lenders are usually mainly concerned with the property itself and how quickly they might be able to sell it at fair market value of the home in the event of a power of sale situation where the borrower has defaulted on their mortgage payment obligations. At that point they want to sell the borrower’s home quick and ensure that there will be enough money left over from the sale to cover their initial investment, interest, and additional fees and costs incurred through the process of selling the home.
With respect to home equity loans, depending on the type of new loan you are seeking and the type of mortgage lender, there may or may not be a minimum credit score at all. In the case of a true private lender who is investing their own personal money into funding your new loan, they may not require you to have any credit history at all. However, again, this will come at a higher interest rate than if you were to get a home equity line of credit from an institutional lender. If you do want to get the lowest home equity loan rate then you would need to have a minimum credit score of 680+ to qualify for a home equity line of credit through the same banking institution with which you currently have your first mortgage, that is if you currently have a first mortgage with a bank that offers the HELOC product.
To help ensure your credit rating stays high, you should keep all revolving debt, like a credit card or gas card, below 30% of the total limit. This means that if your credit card has a limit of $1,000, try to keep the balance on the card lower than $300 at all times. This will help improve and maintain a strong credit score. A strong credit score can help you qualify for great rates and credit products throughout your life.
If you are new to Canada and don’t have a credit history here as a result, there are specialty new to Canada programs that some of our top-rated banks offer. These can come with some of the lowest mortgage rate options.
In the event that you do not currently have a mortgage at all, then you can take a home equity loan with a bank in the form of a first mortgage or HELOC, provided that you qualify for one. For this you would likely need to have a minimum credit rating of 600+ with strong income. If you can’t qualify for a bank HELOC or mortgage, the you would turn to an alternative institutional lender or private lender for one, but don’t expect the lowest rates with the alternative lenders. A qualified licenced mortgage broker would be able to guide you in the right direction and find and help you choose a home equity product that is best suited for your needs and financial situation. With this type of loan, it is best to have a solid plan on when and how you intend to use the funds, and when and how you expect to pay back the principal.
Let’s look at a common example. Take out your calculator and follow along.
You own your home in Toronto, Ontario, Canada and have a current mortgage balance of $400,000 with TD Bank. The current value of your home is assessed at $800,000. If you were to access or plan to take out a small home equity loan of $50,000 in the form of a second mortgage, you might be able to qualify at an interest rate of 5.99%.
To calculate your monthly payment on a $50,000 home equity loan you would take the principal loan amount of $50,000 multiply that my 5.99 and divide by 100 to determine how much you would be paying in 1 year. Then you would divide that number by 12 to get your monthly payment on that loan.
Here’s what that calculation on the calculator will look like:
Yearly interest payment = $50,000 x 5.99 / 100
= 299,500 / 100
= $2,995 a year
This means that after one year of making fixed interest payments, you would have paid $2,995 in interest only. Now let’s calculate your monthly payments on a $50,000 home equity loan. Use your calculator and divide the annual interest payment by 12 to get the monthly payment amount.
Monthly payment = $2,995 / 12
= $249.59 a month
So, as you can see, a home equity loan of $50,000 can end up costing you only $249.59 a month in interest only payments if you are able to qualify for a second mortgage home equity loan at 5.99%. This rate does not include any potential fees associated with getting the loan. Your overall APR could come out to be 8.99% to 9.99% on the low end, but it can also be higher. Your mortgage broker is responsible for explaining this to you and ensuring that fully understand the costs and terms so that you will choose the right path for yourself.
In the case of using this type of home loan to consolidate debt like credit cards with travel points, you will likely be paying significantly less in interest and fixed monthly payments than you would on outstanding balances on those cards. This is particularly a growing problem in cities like Toronto, Mississauga, North York, Markham, Thornhill, Richmond Hill, Maple, and other larger cities and suburbs in the Greater Toronto Area since the cost of living is quite high. This results in more and more people adding debt to those high interest cards and putting off paying down the balance due to cashflow issues. In this situation a home equity loan to pay off the debt on some of those cards can both save you in interest costs, leave more money in your bank account, and position you for a better more cashflow positive situation, and even help improve your credit rating.
One of the main benefits of a HELOC is the fact that it is an open revolving loan that allows you to make interest-only payments only on the money that you use. This is a huge advantage to a more traditional first mortgage from a banking institution or second mortgage which forces you to take out all of the money at once and as you pay back the principal of the loan you no longer have access to those funds. Any withdrawal of funds in the future would require you to go through a whole mortgage refinancing process or take out an additional home equity loan.
As mentioned above, a major advantage of a HELOC is that you can have an available loan limit that you can draw from and pay back at any time, and you only need to pay interest on the amount of the actual outstanding balance. Yes, you can take out a $200,000 HELOC and avoid a full refinancing, provided you qualify for that amount, and not be forced to actually use a penny until you need it. Then you can draw from the line of credit as much or as little as you’d like up to the limit, and as many times as you’d like while only having to make interest payments on the remaining balance portion of the home equity line of credit.
Another key benefit is that the minimum monthly payment amount on a home equity line of credit is usually lower than the monthly payment on a more traditional mortgage with a similar rate or an even lower interest rate than your HELOC. The minimum payments on a HELOC tend to be smaller each month because of the fact that it is based only on the interest amount instead of a blended payment of interest plus principal which is the case with most conventional mortgage products.
In the case of a HELOC from an alternative lender that goes in second position, one of the benefits and advantages to this product is the fact that it is much easier to qualify for than a HELOC through a more conventional bank or lending institution. Since for the most part this type of equity loan is offered through private lenders, the process to apply and get approved tends to be easier, quicker, and less hassle than a more traditional mortgage of home equity line of credit application.
You can also take advantage of the lower interest rates and lower monthly payments to use those funds available to you in a HELOC to payoff higher interest credit card debts, car loans, student loans, and more. These also tend to be less expensive than taking out a personal loan since personal loans are less secured and riskier to lenders.
The drawbacks of a HELOC are primarily the interest rates being higher than the rates of more traditional mortgages. In the case of a home equity line of credit with a bank, those are traditionally between 0.20% to 1.50% higher than the bank’s posted prime rate, whereas with traditional mortgages from the same banks typically start as low as 1.00% below prime.
One disadvantage of home equity lines of credit from conventional banking institutions is that it does require a more stringent and lengthier application process since they are harder to qualify for.
When it comes to home equity loans from alternative lenders such as trust companies, MIC’s (mortgage investment corporation), or private lenders who are individual investors, those HELOC’s are much easier to qualify for, but do come with higher rate and additional fees. To get a quote and a quick approval at a fast rate, you can always call or email the mortgage brokers at Clover Mortgage or chat with us online through Facebook, Twitter, or LinkedIn. You can contact our brokerage at any time in person or online.
Another disadvantage to a HELOC as a type of home equity loan, there are far fewer lenders who offer these home equity loan products in second position after an existing first mortgage, so if you need the money quickly, you might be better off going for a more straightforward second mortgage loan.
Here is a simple to read chart to help you see and compare the pros and cons of a HELOC (home equity line of credit).
|• Revolving limit on the HELOC
|• Interest rates are typically higher on a HELOC than they would be on a mortgage
|• You can use as much or as little as you’d like
|• HELOC’s do require a slightly more involved and lengthier application process than a more straightforward second mortgage loan
|• Minimum monthly payments are equal to the interest on the outstanding balance only
|• If you are not carrying a balance, you do not pay interest
|• You can take out as much money and as many times as you’d like up to the available limit amount
|• Any amount of payment made towards paying down the upstanding balance is then made instantly available for the borrower to withdraw again at any point in the future
|• They are usually open loans that you can pay off the entire amount and close the HELOC at any time without paying any prepayment penalties
|• Most HELOCS have lower rates than many credit cards, travel rewards cards, and other interest-bearing cards have
|• With certain lenders, you can access your funds through a line of credit card for convenience purposes
|• The line of credit cards have the same interest as you line of credit account, which is better than most credit cards
|• Often times you can go through the entire application process online and by phone
If you need help with borrowing equity from your home and getting a home equity loan, then call or email the team at Clover Mortgage. Our team of professional, knowledgeable, and friendly mortgage brokers are always happy to help homeowners make the right decisions when it comes to mortgages, home equity loans, HELOC’s and more. If you own your home, then we can help you get approved quickly and easily for a home equity loan today.
With interest rates sitting at record low rates in 2021, now is the best time to get a HELOC or home equity loan. With great low interest rates, fast and reliable service, and access to over 40 different lenders, Clover Mortgage will ensure that you get the best home equity loan rates and the best HELOC rates that we have available for you. We will contact the lenders to find the best options and mortgage solutions for you so that you can focus your time and energy on other things in your life. It’s important to us that we give you the right mortgage and home equity product for your specific needs and individual situation and goals. This is the Clover Mortgage advantage and our commitment to you, our valued clients.
At Clover Mortgage, we treat all of our clients like they are family. You will feel the Clover Mortgage difference in the first few minutes of speaking with one of our mortgage brokers. After your first call or meeting, you will understand that we have your best interests in mind and will always do our best to help you position yourself for a better financial future.
Yes, there are instances where homeowners are denied when they apply for a home equity loan. In these cases, there may not be enough available equity left to lend on, the home might be in poor or unliveable condition, the location of the home property might be too remote, or for a number of other potential reasons.
No, there are other ways to get an acceptable home or property valuation in some circumstances, so not all home equity loans require a formal appraisal value. For the most part, home loans do require formal appraisals, but some lenders are ok with doing a walk-through of the home or a video tour of the property to determine the home’s value, or some lenders might have access to an online or digital property and home valuation service that they trust and rely on. Especially lenders with a strong foundation in the real estate and mortgage business.
However, in most situations a home appraisal is required for a lender to offer the most loan amount based on the property value. Fortunately, the average residential appraisal costs between $300 to $500 and usually you can recuperate that cost out of the advance from home equity loans upon closing.
In the rarer instances that you can’t afford to go out of pocket, even temporarily, for a home appraisal, speak with your Clover Mortgage broker and they or the brokerage may be able to help pay for the appraisal of your home in certain situations. In other situations, certain private lenders will trust their own personal expertise and personally go view the property, while some other more institutional lenders like banking institutions who might have access to software or online services that can provide them with an automatically generated property value based on the address and other data collected online about your property. This often times can come without any additional costs to the borrower, however, as mentioned, in the majority of instances the lenders will require a proper formal appraisal from an appraising company that the lender approves of. So no need to search for an appraiser since the lender or broker will give you some choices.
Yes, there are closing costs on a home equity loan that you should be banking on in most cases. The amount of those costs will vary and be based on a number of factors including the LTV, the location, the loan amount, whether you are taking out a HELOC, second mortgage, third mortgage, or refinancing a first mortgage. These costs will also depend on the type of lender. With private lenders you can expect to pay higher lender fees and broker fees than you would with an institutional alternative lender (B lender) like a trust company or credit union that lie outside of the mainstream banking world. You would also likely incur additional legal fees as you will most likely be required to pay for both your legal representation and the lenders.
Legal fees on a standard residential home equity loan can start as low as $1,000 for the borrower + $1,000 for the lender and they can grow from there. With regards to lender and broker fees, those are calculated based on a percentage of the total loan amount and can start as low as 0.5% each and go up from there depending on a variety of factors. In the event of refinancing or taking out a HELOC against your home from a conventional AAA lender such as a bank or monoline lender there are no lender fees and no broker fees since these lenders pay the mortgage brokerage directly. The only closing fees that are typically associated with home equity loans from AAA banking lenders would be legal costs.
Home equity loans can be used for many reasons. These include as a tool to consolidate bad debt, pay off tax arrears, invest back into a business as operating capital to grow or maintain your business, for a luxury purchase or to travel, and much more.
If your home does not already have insurance on your first mortgage and you are simply looking at refinancing your first mortgage at a higher value, then you unfortunately cannot get mortgage default insurance on the new loan. Only if your current mortgage has default insurance are you able to have that insurance coverage extended onto a newly refinanced first mortgage.
In the case of a second mortgage or third mortgage, or a HELOC in second position, you are not able to get mortgage default insurance.
It’s understandable that a lot of the text and content in a mortgage commitment can be confusing. When any lender is funding a loan that is secured by real estate, they require that the borrower and property owner update their insurance policy to have the lender named as loss payee. The good thing is, this process is easy, quick, and does not cost you a penny.
All you have to do is call your current home insurance company and ask them to add the new lender as a loss payee and that’s that. You’ve now completed the lender’s requirements regarding your home insurance policy.
In the event that your insurance policy lapses or gets cancelled, you, your lender, and your mortgage broker will get notified by mail almost immediately. Without an active home insurance policy, you are in breach of your mortgage contract and the lender can technically begin the process of warning you about their right to go power of sale if the insurance is not reinstated on your home.
If you receive such a notice, quickly fix the issue with your insurance company or find another insurance company as soon as possible.
Education resources about mortgage and home equity loans is available online or through a mortgage broker. You can always peruse the Clover Mortgage website filled with useful content, tools, and resources geared towards education and providing a strong foundation of knowledge to homeowner and homebuyers. Feel free to call or email us to speak with one of our knowledgeable and helpful mortgage brokers who would be happy to take time to provide you with useful education about the mortgage process.
You can use our home equity calculator to see how much equity is available in your home. Our mortgage payment calculator will help you calculate how much your monthly mortgage payments will be on the new loan. The mortgage refinance calculator will help you understand more about how much of a homer refinance you can get. The Clover Mortgage affordability calculator can help you understand how much of a mortgage you can afford.
*Rates start as low as 4.49%
*Rates are subject to change. Terms and conditions may apply.
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*Terms & conditions may apply.