Borrowing against home equity

From: Financial Consumer Agency of Canada

The Financial Consumer Agency of Canada (FCAC) has expectations for federally regulated financial institutions. FCAC expects them to help you if you're struggling to pay your mortgage due to exceptional circumstances.

Learn more about paying your mortgage when experiencing financial difficulties.

What is home equity

Home equity is the portion of your home that you own. You may need to get a home appraisal to determine the value of your home.

Home equity is the difference between your home’s appraised value and how much you owe on:

your mortgage
your home equity line of credit (HELOC)
other loans and lines of credit secured by your home

For example, suppose your home is worth $250,000, and your mortgage balance is $150,000. You have $100,000 ($250,000 - $150,000) in home equity.

Your home equity may go up:

as you pay down your mortgage
as you pay down your HELOC
as you pay down your other loans and lines of credit secured by your home
if the value of your home increases

Financial institutions may use the amount of home equity you have to determine how much money you may borrow.

How borrowing on home equity works

Your financial institution may allow you to borrow money secured against your home equity. Financial institutions may also call this “equity release.” You may usually borrow up to a total maximum of 80% of the appraised value of your home.

For example, suppose your home is worth $250,000. The maximum amount you can borrow on home equity is $200,000 (80% of $250,000).

Suppose you also owe $150,000 on your mortgage. The maximum remaining amount you may borrow is $50,000 ($200,000 - $150,000).

Your home acts as security for the equity you borrow.

This means:

you may usually get a lower interest rate than with other types of loans
you may face serious consequences, like the foreclosure of your home, if you can’t pay back the money you borrow

You may have to pay administrative fees which include:

appraisal fees
title search fees
title insurance fees
legal fees

You may have to pay a new mortgage loan insurance premium. Your lender may also have to change the terms of your original mortgage agreement.

Home equity products and services

Many financial institutions offer financial products and services based on home equity. For more information about the home equity financing options available to you, contact your financial institution.

Learn about choosing products and services that are right for you.

Second mortgages

A second mortgage is a second loan that you take on your home. It has the same features as a mortgage.

While you pay off your second mortgage, you also need to continue to pay off your first mortgage. Interest rates on second mortgages are usually higher than on first mortgages because they are riskier for lenders.

Learn more about mortgages.

Home equity lines of credit (HELOC)

A HELOC works much like a regular line of credit. You can borrow money whenever you want, up to the credit limit. You pay it back and borrow again.

Learn more about home equity lines of credit.

Reverse mortgages

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

To qualify for a reverse mortgage, you must:

be a homeowner
usually be aged 55 years or older

With a reverse mortgage, you accumulate interest cost. The interest rate is typically higher than with a HELOC or a mortgage. You don’t need to make any payments on a reverse mortgage until the loan is due.

You pay back your loan and the accumulated interest when:

you move out of your home
you sell your home
the last borrower dies
you default on your reverse mortgage

Learn more about reverse mortgages.

Borrowing the amounts you prepaid

You may have made additional payments during your current mortgage term. Financial institutions usually call this a "prepayment" or "lump-sum payment".

If that’s the case, your financial institution may allow you to re-borrow the amount you prepaid. Your financial institution will typically add this amount to your outstanding mortgage balance. This will increase your interest costs.

Learn more about lump-sum payments.

Comparing 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
	Credit limit	Interest rates	Access to money	Fees
Second mortgage	80% of the appraised value of your home, minus the balance of your mortgage	Fixed or variable. Generally higher than on the first mortgage	One lump-sum deposited to your bank account	appraisal title search title insurance legal
Home equity line of credit (HELOC)	65% to 80% of the appraised value of your home	Variable. Will change as market interest rates go up or down	As needed, using regular banking methods	appraisal title search title insurance legal
Reverse Mortgage	55% of the appraised value of your home, minus the balance of your mortgage	Fixed or variable. Generally higher than on a mortgage	One lump-sum deposited to your bank account or in instalments	appraisal title search title insurance legal
Borrowing prepaid amounts	Total of amounts prepaid	Blended or same as your mortgage	One lump-sum deposited to your bank account	None

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Date modified:: 2023-12-22

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