What Is a Home-Equity Loan?

A home-equity loan (often called a second mortgage) lets you unlock a portion of the value you have built in your home without selling it. The lender advances a single lump sum that you repay through equal monthly installments (principal + interest) over a term that can stretch from 5 to 25 years. Because the debt is secured by real estate, interest rates sit well below unsecured personal-loan or credit-card rates—though slightly higher than a first mortgage.

How Equity Is Calculated

Equity = Market Value − Outstanding Mortgages/Liens
Example: Your home appraises at $700,000 and you owe $380,000 on the first mortgage. Equity = $320,000.
Most prime lenders allow the combined loan-to-value (1st mortgage + home-equity loan) to reach 80 % of market value (up to 85 % with certain non-prime lenders). In the example:

• Maximum secured borrowing = $700,000 × 80 % = $560,000
• Room for new loan = $560,000 − $380,000 existing = $180,000

Home-Equity Loan vs. HELOC

Home-Equity Loan (Second Mortgage)

• Single lump-sum advance
• Fixed or variable rate (fixed is common)
• Blended into regular, amortizing payments
• Best for one-time needs with a clear price tag

Home-Equity Line of Credit (HELOC)

• Revolving credit—you draw, repay, redraw
• Variable rate tied to prime
• Interest-only minimum during draw period; converts to amortized payments later
• Ideal for staggered expenses (multi-stage renos, tuition paid per semester)

Typical Uses of a Home-Equity Loan

Major Renovations. Kitchens, additions, solar-panel installations—projects that boost comfort and resale value.
Debt Consolidation. Trading double-digit credit-card APRs for a single, mortgage-level rate can slash monthly outflow.
Large Life Expenses. University tuition, elder-care costs, or helping kids with a down payment.
Business or Investment Capital. Using equity to buy a rental property or fund a business venture (seek tax and legal advice first).

Eligibility: What Lenders Check

• Equity Cushion: CLTV ≤ 80 % prime, ≤ 85 % non-prime.
• Credit Score: ≥ 650 for bank/credit-union rates; 550–649 possible with alternative lenders.
• Income Stability: Salaried, hourly, pension, or two-year averaged self-employment. Debt-service ratios (GDS ≤ 39 %, TDS ≤ 44 %).
• Property Type & Condition: Standard urban freehold homes easiest; condos, rural, or unique builds may cap LTV lower.
• Purpose of Funds: Lenders ask; risky uses (crypto trading, high-leverage speculation) may be declined.

Step-by-Step Application Timeline

1. Initial Discovery (Day 1). Quote request, rate discussion, document checklist.
2. Document Upload (Days 1-3). Government ID, income proof, latest mortgage statement, property-tax bill.
3. Credit Pull & Pre-Approval (Day 3). Soft indication of limit and rate.
4. Appraisal Ordered (Days 3-7). On-site or desktop; report delivered to lender.
5. Underwriting (Days 7-10). Income ratios, property title search, insurer sign-off if high-ratio first mortgage exists.
6. Commitment Letter Issued (Day 10-12). Final rate, payment, legal instructions.
7. Legal Closing (Days 12-20). Lawyer/notary registers second mortgage, handles disbursements, pays out liens if consolidating debt.
8. Funding (Day 20 ≈). Net proceeds wired to your chequing account.

Interest Rates & Fees in 2025

• Prime-lender fixed 5-year home-equity loan: 5.5 % – 6.25 %
• Alternative-lender fixed: 7 % – 10 % (credit ≥ 600)
• Closing Costs: appraisal $350, legal $900–$1,200, title insurance $200, provincial registration $75–$150
• Prepayment: 10 %–15 % lump-sum per year free; full discharge penalty = 3 months’ interest or IRD (check lender).

Tax Considerations

Interest on a home-equity loan is not tax-deductible when used for personal consumption (renovations, debt consolidation). However, if proceeds are invested to earn income (rental property, dividend-paying stocks) the interest can often be deducted—confirm with a CPA.

Risks & Mitigation

• Foreclosure Risk: Missed payments jeopardize your home. Mitigation: keep a 3-month emergency fund.
• Rate-Renewal Shock: If you choose a short term, renewal rates might be higher. Mitigation: consider a longer fixed term if rates seem poised to rise.
• Negative Equity: Over-borrowing plus market downturn could leave you owing more than the house is worth. Mitigation: stay well below max LTV.

Alternatives You Should Compare

• HELOC: Flexible draw, interest-only option, variable rate.
• Cash-Out Refinance: Replace and enlarge your first mortgage—may yield a lower blended rate but restarts amortization.
• Unsecured Personal Loan: Faster, no collateral, higher rate, shorter term.
• Government Grants: CMHC Eco Reno Rebate, provincial energy-efficiency programs.

Pros & Cons Recap

Pros: Lower rate than unsecured credit, high borrowing limit, predictable amortization, potential tax deductions when invested.

Cons: Closing costs, home at risk if defaulted, ties up equity for years, prepayment penalties on full discharge.

Frequently Asked Questions

Can I get a home-equity loan if I’m self-employed?
Yes—provide two years of T1 Generals and NOAs or bank-statement programs with alternative lenders (higher rate) if taxable income is low.

Is mortgage-default insurance required?
Not for stand-alone second mortgages, but your first mortgage must remain ≤ 80 % LTV or be CMHC-insured.

How quickly can I access funds?
Prime lenders close in 2-3 weeks once appraisal and documents are done; alternative lenders can fund in 7-10 days.

Do I need to re-qualify when the term ends?
Yes, like a first mortgage, you renegotiate at maturity—either renew, refinance, or pay off; income and credit will be reassessed.

Can I split the loan into fixed and variable portions?
A few lenders offer a “bundle” letting you allocate part to a fixed-rate loan and part to a variable HELOC—ask your broker.

What happens if I sell my home?
Sale proceeds first pay off the home-equity loan and any other registered mortgages; leftover equity is yours.