What Is Home Equity?
Home equity is the portion of your home which has been paid off to date and is therefore actually owned. Home equity can be calculated by determining the current market value of your house, and subtracting the remaining amount owing on your mortgage.
For example, if your home’s market value is $1,000,000 and your remaining mortgage is $600,000 your equity would be $400,000.
Two factors will commonly affect your home equity. The market value of your home will fluctuate and influence your potential equity. A strong market can increase the home value, and therefore the possible equity. Secondly, the balance owing on your home. With each mortgage or loan payment your equity will increase.
What Is a Home Equity Loan?
In Canada, “home equity loan” is an all-encompassing term used to describe various loan types which use the borrower’s equity in their home as collateral. Types of home equity loans include:
- Home equity line of credit (HELOC) is a line of credit that uses your home as a guarantee the loan will be repaid. A HELOC in Canada can be issued for up to 65% of your home’s market value. The main benefit of a HELOC, as opposed to a mortgage, is that HELOCs allow you to borrow up to your credit limit and pay off at your own pace with great flexibility. In many ways, these products function more like a credit card than a mortgage.
- Second mortgages are mortgages taken out on your home, which sit on top of an already existing first mortgage. A second mortgage allows homeowners to borrow money from the equity in their home, without refinancing their current mortgage. Using your home as collateral, you can obtain funds to finance projects, consolidate debts, and major purchases.
- Reverse mortgages are mortgages accessible to senior Canadians (55+) which allow homeowners to convert up to 55% of their home equity into cash, tax-free. These funds can then be used for any needs necessary, including renovations, major expenses, or debt.
- Refinancing a mortgage is when a homeowner takes out a new loan to pay off their original mortgage(s), typically in order to reduce their interest rate. Generally, the loan used for refinancing has its own terms, unique from the original mortgage and can be from a separate lender.
Qualifying For a Home Equity Loan
Qualifying for a home equity loan will be dependent on your credit score, employment history and income, and your accessible equity. Depending on these factors, a borrower will be able to obtain financing through one of several different lender types. Rateco works with all types of lenders, from private financing to Canada's Big 5 banks, to ensure you receive the financing you need regardless of your credit history.
What is your credit score?
- ‘A’ lenders – such as the major Canadian banks, primarily servicing borrowers with credit scores of 600 - 900
- ‘B’ lenders – are smaller lending institutions offering higher rates but more tolerant qualification standards, financing Canadians with credit scores between 550 - 700
- Private lenders – typically investment corporations or private individuals who offer the most lenient qualification criteria, but also the highest rates. If your credit score is below 600, a private home equity loan may be your best bet
Rateco's mortgage agents will work with you on a one-to-one basis to determine what financing route you're best suited for.
How much are you looking to borrow?
A borrower’s home equity loan borrowing capacity is reliant on value of their home and how much equity they have in it. In Canada, banks and other primary lenders will generally provide financing up to 80% of the loan to the value of the home. Borrowers requiring more than 80% loan-to-value (LTV) will need to resort to private lenders who provide financing up to 90% LTV. Loan-to-value can be calculated by dividing the amount needed for your home equity loan by the appraised value of your property.
Rateco works with loan-to-values of up to 90% on refinances and 95% on home purchases.
What is the estimated value of your home?
Home equity loans leverage the borrowers home equity (amount a homeowner has paid off or owns of their house) as collateral. Providing this estimate helps determine the amount a borrower may be eligible to receive on their loan. The higher a home is valued the greater the borrowing capacity, depending on how much of the house is owned vs. owed.
Do you have any existing mortgages on your property?
Existing loans or mortgages on a property help determine a borrower’s equity. Existing mortgages will reduce a homeowner’s equity on the property and therefore their borrowing capacity. If a property is free and clear a borrower can maximize their borrowing eligibility.
Once the above information is provided to the Rateco Home Equity Loan Calculator you'll be provided with custom tailored interest rates based your individual needs and qualifications. You can choose to proceed with an instant approval process or talk to one of our mortgage experts to answer nay further questions you may have.