When Canadian homeowners want to borrow large amounts of money at a low rate of interest, home equity loans are the first option they usually consider. But how can you be sure that you’re getting the best interest rates available on home equity loans? And how can you make your application is competitive as possible? These three tips will help you secure the best loan for your needs at the lowest possible rate.
1. Borrow for the right reason
There are many good reasons to take out a home equity loan. But there are also many bad reasons to take out a home equity loan. The most important question you should ask yourself when trying to figure out whether a home equity loan is right for you is: “will this loan put me in a better financial situation?”
When you take out a home equity loan, you are borrowing against the value of your property — it is essentially a second mortgage. The last thing you want is to needlessly extend your mortgage period because you wanted to go on holiday or buy a fancy new car.
Instead, you should only borrow if borrowing will end up saving you money in the long run. Some good examples of smart home equity borrowing are:
- Debt consolidation
- Funding repairs
- Investing in the property through high-value renovations
All of the reasons for taking out a home equity loan listed above will help you reduce interest payments and enhance your assets, making them smart investments in your long-term financial prospects.
2. Only borrow what you need
A home equity loan can unlock huge amounts of capital, depending on your home value and how much of your mortgage has already been paid off. In some cases, you may be able to borrow up to 85% LTV — meaning that if you have $300,000 in home equity, you could get more than $250,000.
But just because you can borrow a large sum doesn’t mean that you should. Interest rates reflect risk, and the larger the loan, the more risk involved for the lender. This means it’s a good idea to figure out how much you need to cover debt consolidation, repairs, or renovations, and only borrow that amount.
3. Work with a mortgage broker
In Canada, almost everyone gets a mortgage through a bank or other financial institution. But if you are searching for the lowest home equity loan rates in a place like the Greater Toronto Area, what you want to do is expand your options: being able to shop between different loans will empower you to choose the rate best suited to your situation.
The best way to do this is by working with a mortgage broker. Unlike banks, mortgage brokers don’t sell their own financial products, but serve as a middleman helping to connect you with a wide range of lenders. Not only does this expand the number of loans available, it also ensures that you’re getting the best deals, regardless of your credit score.
A home equity loan can be one of the smartest ways for homeowners to access the capital they need. And while home equity loan rates are almost always going to be lower than the rates you’d get from an unsecured loan, borrowing for the right reasons, only borrowing as much as you need, and working with a mortgage broker will ensure that you get the most affordable loan possible.