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Do you own a home in Ontario and could use some financial relief? Most people never think about the possibility of taking out a home equity loan when times deliver a surprise. They pay on their mortgages, month after month, making that payment their top financial priority (as they should). They’ve amortized those mortgages over the years, building up hundreds of thousands of dollars in principal equity.
Then, one day, some of them get to work and find out that they have been downsized. They have spent time in middle management, or even higher in the organization, and they’re in their 40s or 50s, and so it’s hard to find a job right away. Three months out of work become six, or nine. They take on consulting work, but it’s not at a comparable salary level, so they have to start using savings. Then they have to start charging their bills on their credit cards. By the time they’re back to work, they have four or five figures of consumer debt at high interest rates.
Some others thought that they were saving up enough money for their kids’ tuition, but then the fees and other expenses ended up being significantly more than they had thought they would be. Others had a spouse pass away and didn’t have enough life insurance taken out and had to take on consumer debt in order to make ends meet until they could sell the house where they were living and downsize.
Long story short — if you live in Toronto, Ottawa, Hamilton, or other parts of Ontario, you’re far from alone if you have significant equity built up in your house but now find yourself facing some expenses that you need to pay — and the other savings you have aren’t quite going to do it.
Getting A Home Equity Loan in Ontario – Fast Pre-Approval
When you talk about a home’s equity, that is the percentage of the home that you own. Some people get 100% equity at purchase, because they can pay in cash for the whole property. Most people, though, have to take out a mortgage to be able to afford their home, and so they start out with a down payment. Many lenders will accept a down payment as small as 5%, but if you want to avoid private mortgage insurance (PMI) premiums, then you want to put at least 20% down. Whatever percentage you put down is the equity with which you begin paying your mortgage.
Each month, when you make a mortgage payment, some of that payment goes to cover the interest on the loan, while the rest goes to pay down the principal, or the outstanding balance. At the beginning, almost all of your payment goes to satisfy interest, but with each month, more and more of your payment goes toward principal, and the more principal you pay off, the more equity you have in your house.
Sometimes people run into a little trouble financially after they have been paying their mortgage off for a number of years. Financially traumatic events such as divorces, illnesses, lost jobs can wreak havoc on a family’s financial position, and if you find yourself in this situation, you are far from alone. Especially in the years since the financial collapse of 2008 – and more recently in provinces where the low oil and gas prices have caused turmoil in that industry – people have lost jobs and have had to subsist on one salary instead of two.
At Amansad Financial, we take a lot of inquiries from people who want to take out a home equity loan in Ontario, Canada. There are many reasons to take out a loan against your home equity, and a lot of them have to do with scenarios in which your credit might have slipped a bit. Maybe you’ve gone from a two-income home to a one-income home, and you’ve had to put a lot of your normal expenses on a credit card or two, and those balances have gotten out of control, as you make minimum payments but have noticed the monthly interest expenses climbing regularly.
When you take out an equity loan against your home that has an existing mortgage, it is adding a second mortgage to the property. If you have bad credit, a home equity loan may be required to bridge the gap. That second loan already represents additional risk for a lender – because if you go into default and the home goes to a distressed foreclosure sale, that first mortgage has to be satisfied in full before the second lender gets a single loonie out of the deal – and when your credit has slipped, that’s a sign that you are having a difficult time meeting your monthly expenses each month.
So when you go looking for a bad credit second mortgage aka home equity mortgage loan in Ontario private lenders may be the solution for you if a home equity line of credit (HELOC) is not available.
How does a home equity line of credit in Ontario work?
With most traditional lenders in Ontario, you can take out up to 65% of the value of your home with a HELOC. Some lenders will let you go as high as 80%, provided you have 15% of the equity dedicated to a standard amortized mortgage. Here’s how this would work. If you bought a home for $750,000, and you have paid the principal down to $500,000 on your mortgage, then you have $250,000 in equity. However, there is another factor in calculating equity – the appraised value of your house today. At any point in time, your equity is the difference between appraised value today and the amount that you owe. Real estate prices have been on the rise in Toronto and the Greater Toronto Area (GTA). Other areas in southern Ontario have also benefited, so it’s likely that your $750,000 home would fetch more on the market today. Let’s say that the appraised value today would be $800,000. If you find a lender who lets you take up to 75% of your home’s value out, that would free up $100,000 for you, because your total amount owed would climb to $600,000, or 75% of $800,000.
How do I get my money through a home equity line of credit in Ontario?
With a traditional home equity loan, you get a check from your lender for the agreed amount, and then you start making installment payments on the principal and interest, just like with your first mortgage. With a HELOC, things work a little differently. You receive access to a revolving line of credit, and you can use as little or as much of it as you need. With some lenders, you’ll get a special checkbook that has checks that you can deposit to your own bank or write directly to payees, such as credit card companies to whom you owe high balances. With other lenders, it comes in the form of a debit card that you can use to make payments or even withdraw money.
When you take out a home equity line of credit, you make payments at a variable interest rate that is generally higher than what you would pay for a variable mortgage. However, you don’t make any payments until you actually start using the HELOC. Once you start using it, you make payments on the part that you have used. You will have a draw period – a time period during which you have access to the money. A typical draw period is ten years, although each lender has different programs available and why it’s important to work with a broker as opposed to single institution.
It’s important to remember that, once you have a line of credit up and running, it is important to manage the amount that you borrow. In a scenario like the one above, you could end up with a credit line in the five or six figures, which can seem like a huge amount of money at the time. However, just like a traditional home equity loan or any other credit granted against your house, if you default on it, the lender can come after your house. So if you find yourself getting beyond your means on a second lien against your house, things could turn sour in a hurry.
While it is a good thing to have enough equity in your house to help you out during difficult times, remember to be conservative in the way that you use the money that you have. It is best to put together a plan for getting back on track that uses your HELOC to get rid of high-interest debts. If you end up using your line of credit for monthly expenses, you’ll find yourself in real trouble sooner than you think. If a HELOC isn’t an option, and things have become difficult and you simply need to hit a reset, Amansad Financial can look at short term private mortgage options so that once credit has been improved, you can merge the 1st & 2nd mortgage into a manageable single payment.
At Amansad Financial, we are able to assist clients all over Ontario — in the big cities as well as Kitchener, Mississauga, and London and other points on the map — find home equity financing. Whether it’s a traditional home equity loan, leading to a second mortgage payment each month, a home equity line of credit (HELOC), or a Reverse Mortgage; you can take advantage of the money that you’ve paid to take care of these other needs, and pay yourself back at a much lower interest rate than what you would face using credit cards or other forms of unsecured debt. A HELOC only costs you when you actually use money that you’re pre-approved to take out, giving you the most flexibility.
If you’re finding yourself a bit on the ropes financially and have enough equity to make a loan a consideration, give us a call at Amansad Financial. Our home equity specialists can discuss with you and make a personalized recommendation to get you back on top of matters.