Borrowing against home equity

From Financial Consumer Agency of Canada

Why borrow against home equity

Home equity is the difference between the value of your home and the unpaid balance of your current mortgage.

For example, if your home is worth $250,000 and you owe $150,000 dollars on your mortgage, you would have $100,000 in home equity.

Your home equity goes up in two ways:

  • as you pay down your mortgage
  • if the value of your home increases

You may be able to borrow money that will be secured by your home equity.

Interest rates on loans secured with home equity can be much lower than other types of loans. You must be approved before you can borrow from your home equity.

Be aware that you could lose your home if you’re unable to repay a home equity loan.

Not all financial institutions offer home equity financing options. Ask your financial institution which financing options they offer.

Compare your options

Decide which type of loan best suits your needs, compare the different features of each option.
Table 1: Compare your options to get money from home equity
Refinance your home Borrow prepaid amounts Home equity line of credit (HELOC) Second mortgage
Credit limit 80% of your home’s appraised value, minus the unpaid balance of the existing mortgage Total of amounts prepaid 65% to 80% of your home’s appraised value 80% of your home’s appraised value, minus the unpaid balance of the existing mortgage
Interest rates Fixed or variable. May result in a change to the existing interest rate on your mortgage or a different interest rate for the refinanced portion Blended or same as your existing mortgage Variable. Will change as market interest rates go up or down Fixed or variable. Generally higher than on the first mortgage
Access to money One lump sum deposited to your bank account One lump sum deposited to your bank account As needed, using regular banking methods One lump sum deposited to your bank account
Fees

Administrative fees may include:

  • appraisal fees
  • title search
  • title insurance
  • legal fees
None Administrative fees may include:
  • appraisal fees
  • title search
  • title insurance
  • legal fees
Administrative fees may include:
  • appraisal fees
  • title search
  • title insurance
  • legal fees

Refinance your home

You can borrow up to 80% of the appraised value of your home, minus what you have left to pay on your mortgage, home equity line of credit or any other loans that are secured against your home.

Your lender may agree to refinance your home with the following options:
  • a second mortgage
  • a home equity line of credit
  • a loan or line of credit secured with your home

The money you borrow may be deposited in your bank account all at once.

Example: Refinancing your home

Suppose you want to refinance your home to pay for renovations. Your house is currently worth $300,000 on the real estate market. You still owe $175,000 on your mortgage.

If your lender agrees to refinance your home to the $65,000 limit, you would owe a total of $240,000 on your mortgage.

Table 2: Example of refinancing your home
Appraised value of your home $300,000
Maximum loan you may get x 80%
Loan amount based on appraised value of your home = $240,000
Less balance you owe on your mortgage – $175,000
Refinancing credit limit $65,000

Interest rates and fees if you refinance your home

The interest rate on the refinanced part of your mortgage may be different from the interest rate on your original mortgage. You may also have to pay a new mortgage loan insurance premium if your existing mortgage amount is modified.

You may have to pay administrative fees which include:

  • appraisal fees
  • title search
  • title insurance
  • legal fees

You may have to change the terms of your original mortgage agreement.

Borrow on amounts you prepaid

You may be able to re-borrow money that you prepaid. If you have made lump-sum payments on your mortgage, your lender may allow you to re-borrow that money. You can borrow total amount of all the prepayments you made. Any money you re-borrow will be added to the total of your mortgage.

The money you borrow may be deposited in your bank account all at once.

Example: Borrow on amounts you prepaid

Suppose you want to borrow money to pay for home renovations that will cost $15,000.

Assume the following:

  • you’ve held your mortgage for three years
  • you have $250,000 left to pay on your mortgage
  • over the past 3 years, you’ve prepaid an extra $20,000 against your mortgage

If your financial institution allows you to borrow $15,000 from the amount you prepaid, you’ll owe $265,000 ($250,000 + $15,000) on your mortgage.

Interest rates and fees if you borrow on amounts you prepaid

You will pay either a blended interest rate or the same interest rate as your mortgage on the amount you borrow. A blended interest rate combines your current interest and the rate currently available for a new term.

Fees vary between lenders. Make sure to ask your lender what fees you’ll need to pay.

You may not have to make any changes to your mortgage term.

Get a home equity line of credit

A home equity line of credit (HELOC) works much like a regular line of credit. You can borrow money whenever you want, up to the credit limit. You can take out money from a home equity line of credit when you need to by using your regular banking methods. You pay it back and borrow again. This line of credit is secured by your home.

Get a second mortgage

A second mortgage is a second loan that you take on your home. You can borrow up to 80% of the appraised value of your home, minus the balance on your first mortgage.

The loan is secured with your home equity. While you pay off your second mortgage, you also need continue to pay off your first mortgage. If you can’t make your payments and your loan goes into default, you may lose your home. Your home will be sold to pay off both your first and second mortgage. Your first mortgage lender would be paid first.

Your lender may deposit all the money in your bank account all at once.

Example: Getting a second mortgage

Suppose you need money to pay for your child’s post-secondary education. Consider how much you may be able to borrow with a second mortgage.

Assume the following:

  • your home is worth $250,000, according to an appraisal
  • you owe $150,000 on your mortgage

Table 3: Example of a second mortgage
Appraised value of your home $250,000
Maximum loan allowed x 80%
Loan amount based on appraised value = $200,000
Less balance you owe on your mortgage – $150,000
Second mortgage credit limit $50,000

Interest rates and fees on second mortgages

Interest rates on second mortgages are usually higher than on first mortgages because they are riskier for lenders.

You may have to pay administrative fees such as:

  • an appraisal fees
  • title search fees
  • title insurance fees
  • legal fees

Get a reverse mortgage

A reverse mortgage allows you to borrow up to 55% of the current value of your home.

You must be a homeowner and at least 55 years old to qualify for a reverse mortgage. If you have a spouse, both of you must be at least 55 years old to qualify.

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