5.3.6 Borrowing on home equity

From: Financial Consumer Agency of Canada

A mortgage is a way to borrow money using the home you are buying as security for the loan. If you already own the home or have a mortgage on it that is less than the current value of the home, you can sometimes still use the home as security for a loan. It is important to consider whether you can afford the additional debt load and new payments. There is also a risk that the market value of your home could change over time, and fall below your outstanding mortgage amount.

Usually the interest rate on a loan secured with your home is much lower than the interest rate on other loans, such as a personal loan or a credit card. However, there are extra fees when you use your home as collateral for a loan.

The main loan options are:

  • Refinancing: If the mortgage lender agrees, you can negotiate a new mortgage contract for a higher amount, if you have paid down part of the mortgage or if you did not borrow the maximum amount initially. Usually you can refinance no more than 80 percent of the value you own in the home.
  • Borrowing back your prepayments: If you have made extra payments, some lenders will let you borrow those prepayments back. The amount will be added to your mortgage principal, sometimes at a higher rate of interest.
  • Home equity line of credit (HELOC): Your lender may offer a line of credit using your home as security. With a line of credit, you can borrow when you need to, up to a limit, and pay it back when you can, provided you make a minimum monthly payment. But the interest rate on the line of credit may not be the same as the interest rate on the mortgage, and it may not be fixed. Also, the minimum payment may include only interest, so you have to be sure you carefully plan to repay the whole loan amount.
  • Second mortgages: Lenders may agree to give you a mortgage even if there is already a mortgage on your home. Like the first mortgage holder, the second mortgage holder has a right to seize your home if you can't make your payments. However, if the house is sold, any money will go to pay the first mortgage before the second mortgage, so the second mortgage is riskier and will usually have a higher interest rate than a first mortgage.

With any of these options, you have to qualify under the lender's credit conditions, and negotiate a loan agreement. Be sure you understand and agree to the terms of the agreement.

Reverse mortgages

A reverse mortgage is a loan for homeowners 55 years of age and older that is secured by the owner's equity in the home—that is, the portion of the home's value that is debt-free. A reverse mortgage lets seniors get cash without having to sell their home. Unlike an ordinary mortgage, you don't make payments. Instead, the interest accumulates, and the equity that you have in your home is paid to you over time. When you sell your home or move, or when your estate is settled after your death, you repay the loan plus interest.

The interest on reverse mortgages is higher than the cost of conventional mortgages, and they are subject to many conditions. Investigate them thoroughly before making any decisions about a reverse mortgage.

To learn more, see the Financial Consumer Agency of Canada’s information on Reverse mortgages, or the reverse mortgages information at the Autorité des marchés financiers website.

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