Secured Loans in Canada 2021

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What is a secured loan?

A secured loan is a loan that has collateral backing the borrowed amount up. This collateral, or security, will be turned over to the lender if you default on the loan. The most common type of collateral is real estate property. This type of secured loan is called a mortgage.

Other types of collateral can include cars, bank savings, and investment accounts. For example, a car loan is considered a secured loan, as your lender will have the title of the car until the car loan is paid back.

Having an asset backing up your loan means that the lender can recover money from you even if you do not pay back the loan. How this works is the lender will place a lien on the asset that you are putting up as collateral. This means that they have a claim on your asset. The lender will be a lienholder on your asset, and will continue to be a lienholder until the secured loan is paid back.

In exchange for putting up collateral, secured loans have lower interest rates than unsecured loans. Secured loans may also allow you to borrow more money than unsecured loans.

Home Equity Loans and HELOCs

If you are a homeowner and you are looking to borrow money, home equity loans allow you to use your home equity to borrow money. Home equity loans are secured by your home equity, which is the value of your home less any other debt owing on it, such as a mortgage. A home equity loan has a fixed amount that you borrow upfront, and has a certain term length. Home equity loans have a fixed interest rate.

A Home Equity Line of Credit is a much more flexible way to borrow money for homeowners. A HELOC is a secured loan against your home equity, but unlike a home equity loan, HELOCs allow you to borrow as little or as much as you like within your credit limit, and you can borrow money at any time without the need for additional loan applications. Most HELOCs have variable interest rates that can rise or fall depending on the Prime Rate.

Whether a HELOC is better or a home equity loan is better depends on your financial goals. Home equity loans are a great way to finance large projects, such as home renovations, that have a large one-time cost. Home equity loans also have fixed interest rates, which means that you can know for certain the cost of the loan. HELOCs allow you to borrow at any time, which makes it a more flexible option if you have ongoing expenses. Variable interest rates also means that HELOCs can be a cheaper option if rates fall in the future, but rising rates will mean that you will be paying more.

You still need to pass the stress test even when applying for a home equity loan or a HELOC.

Home Equity Loans vs HELOCs

Home Equity LoansHome Equity Line of Credit (HELOC)
Maximum (% of home value)80%65%
Type of LoanInstallment (Fixed)Revolving
Access to CreditOne TimeAnytime
Interest Charged OnEntire AmountAmount Borrowed
Interest TypeFixedVariables

HELOC Approval Process

Can my home be used as collateral for more than one loan?

Your home can be used as collateral for more than one secured loan. For example, if you have a mortgage on your house, you can still take out a home equity loan or a HELOC. Home equity loans and non-standalone HELOCs are also considered to be second mortgages. You may also even take out a third mortgage through some private mortgage lenders.

When you secure a loan against your home, lienholders have a stake on the title of your home. Having more than one lienholder means that there will be a priority in who will be repaid first in the event that you default on your loans.

Your first mortgage is the lien held by the mortgage lender that is first in line should you default. If you take out a second mortgage, which is often offered by private mortgage lenders, then the second mortgage lender will be second in line. If you default, your home will be sold. The amount recovered will first be paid to the primary lien holder until they recover their full amount. Any leftover amount is then paid to the second lienholder, and then other lienholders, until no amount is left or the debt is paid back in full.

An underwater mortgage happens when your outstanding debt on your mortgage is more than the value of the home. This happens if home prices fall, and if your existing home equity is not enough to cover the fall.

Being underwater on your mortgage is dangerous, because your mortgage lender may not recover the full amount that you borrowed should you default. Your mortgage lender may take steps as far as foreclosure. In a foreclosure, your mortgage lender takes possession of your home and then sells it. The money from the sale of the home will be used to pay back the mortgage. You will be evicted from your home, and if the foreclosure did not cover the full amount of the mortgage, you may still need to repay that amount.

Since the first mortgage lender will still be first in line to recover money, they will not be affected should you take out a second mortgage or a home equity loan. Taking out a HELOC will not affect your first mortgage.

Secured vs Unsecured Loans

Unsecured loans have no collateral, meaning that they are riskier loans for lenders. Unsecured loans have higher interest rates, and may have shorter loan terms and lower borrowing limits. Unsecured loans include personal loans and credit cards.

A secured loan lets you borrow more at a lower cost, but it does mean that you need to have existing collateral available. If you are a new homeowner without much equity in your home, your options for a secured loan can be limited. Home equity loans can only be up to 80% of the value of your home, or a loan-to-value (LTV) of 80%. Stand-alone HELOCs can only be up to 65% of the value of your home. This means that you can only get a home equity loan if you make a minimum down payment of 20%, or have built up equity equivalent to 20% of your home value.

Stand-alone HELOCs will require at least 35% equity before you can start borrowing. If you plan to have both a mortgage and a HELOC, the combined loan cannot be more than 80% of the value of your home, with the same 65% LTV for the HELOC portion.

While HELOC rates can be much lower than interest rates for unsecured personal loans, HELOCs still have higher rates than those for mortgages. You may want to consider a mortgage refinance which allows you to borrow at low mortgage rates, but still unlock equity in your home.

Secured loans can have a lengthy application process. Collaterals need to be verified, and in the case of a home, an home appraisal and inspection is needed to determine the value of the home. This can add costs and may not be ideal for situations where you need money quickly.

Secured vs Unsecured Loans

Secured LoansUnsecured Loans
Interest RateLowHigh
Credit LimitHighLow
Ease of ApplicationLengthyQuick
Collateral NeededYesNo

Can I get a secured loan with bad credit?

You can get a secured loan even with bad credit, and secured loans are easier to get with bad credit than unsecured loans. Private mortgage lenders offer second and even third mortgages to homeowners. Some of these lenders have no minimum credit score required to get a loan, and some do not check your credit score at all. Private lenders are also not required to conduct a stress test when you apply for a mortgage with them. What is looked at more closely is the amount of equity that you have in your home. Having equity can let you get a loan even with bad credit, however, loans from private lenders have much higher mortgage interest rates and fees.

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