19 Dec 2019 Home Equity Loans
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. With a home equity loan, homeowners can generally borrow up to the value of their home, minus the property’s outstanding mortgage amount.
Different formats of home equity loans include home equity line of credit (HELOC), second mortgages, or reverse mortgages to name a few. Each of these loan types offer borrowers different means of obtaining financing by leveraging their home equity.
Factors Lenders Consider When Providing a Home Equity Loan
Taking on a home equity loan requires you to have equity in your home to borrow against. When the loan is being issued by a private lender, as opposed to a major Canadian bank, your available equity will likely be the most important factor in determining your eligibility.
2. Income & Credit Score
Income, employment, and credit score requirements will differ depending on what type of lender you’re looking to borrow from.
Canadian banks and ‘A’ lenders will be strict in needing proof of steady income, gainful employment, and a strong credit score, generally above 620.
Private and ‘B’ lenders offer greater flexibility to those who are self-employed, in-between jobs, or have a credit score below 620. Private lenders generally place greater significance on equity rather than income or credit score.
3. Property Value
Lenders will want to calculate loan-to-value (LTV) ahead of providing any borrower a home equity loan. LTV is calculated by dividing loan amount by the total value of the home. This is used by lenders as a risk assessment. Typically, the higher your LTV percentage, the greater the risk is for the lender. As a result, higher LTV home equity loans can expect to have a higher cost of borrowing.