With CERB coming to an end for the majority of Canadians, many are starting to look for alternative solutions of meeting their mortgage payments. Many Canadian banks and private mortgage companies recently took action to make it easier for consumers with urgent financial needs due to the coronavirus pandemic, and to obtain access to mortgage credit more quickly.
Before you tap your home equity, evaluate all your options
If you are considering refinancing your mortgage or taking out a home equity loan to deal with increased expenses, a loss of income, or for any other reason, it’s important to look at all of your options. While using home equity may be a good option for some consumers, it may put others at increased financial risk down the road, depending on your current and projected financial situation. If your finances don’t recover as quickly as expected or your home loses value and you have difficulty paying your loan, you could lose your home to foreclosure.
How a home equity loan works
A home equity loan allows you to take out a lump sum of cash that you must begin repaying immediately. Home equity loans have fixed interest rates, meaning your payments will be the same every month.
In order to tap into your home’s equity via a home equity loan, you’ll need to go through a process that’s very similar to obtaining a mortgage. However, the process will be much less strict than if you were working with a bank, as private mortgage companies like Leap Financial don’t care all that much about your credit or employment history. They will still be factored into how much you can borrow and the rate you qualify for but won’t be a deal breaker on its own if you’ve never had a credit card.
The most important things to know is that lenders will consider multiple factors, including your current debt-to-income ratio, loan-to-value ratio, credit score, and annual income. Additionally, to determine the amount of equity in a home, a lender will employ an appraiser to determine the current market value of the home, which is based on its conditions and comparable properties in the area.
There’s a limit to how much you can borrow
There’s also a limit to the amount you can borrow on a home equity loan, or a point of ‘capping out’. To determine how much money you’re eligible for, lenders will calculate your loan-to-value ratio. Even if you have $300,000 in equity, the majority of lenders will not approve you to borrow that much money.
Lenders generally allow homeowners to borrow up to 80 percent of the equity they have in their home. That number can be different from person to person, though, and could be decided by your credit score, financial history and current income. With $300,000 in equity, expect to receive a loan for a maximum of $250,000, assuming you have good credit.
Know how not to use your home equity
In times of uncertainty such as now, common sense has it to tighten our belts and make only the necessary payments needed. However, some of us likes to go against the grain and instead opt for a “pick me up” vacation or luxury item. Most lenders and financial advisers agree that the worst reason to tap home equity is for unnecessary personal expenses, such as an extravagant vacation or a new boat or over-the-top luxury vehicle.
While it may be tempting to spend your hard-earned money on something other than house payments, it is better to devise a savings plan to cover these fun but unnecessary expenses than to borrow from your house, especially during times of COVID-19.
When it comes to your home equity, it is advised to not borrow more than you need. If you need help with applying for a home equity loan, or have questions of how a home equity loan can help your current situation, send us a message and we would be happy to help.