Secured Loans in Canada 2023

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What You Should Know

  • You’ll have a better interest rate with a secured loan than an unsecured loan.
  • Your lender has less risk because they can seize the asset if you don’t pay.
  • A loan can be secured by real estate, cars, or many other assets.
  • The secured item is known as collateral.
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Chances are, you already understand what a secured loan is but aren’t familiar with the term. The most common type of secured loan is a mortgage. Your Canadian mortgage lender secures the loan with your home. As a result, if you don’t make mortgage payments, the lender can repossess your home. However, secured loans are the secret to low interest rates because your lender has less risk.

The secured home is known as collateral, and the lender has a lien on the property. The lien is a legal agreement that allows the lender to take your home if you don’t make monthly mortgage payments. However, there are many different types of assets you can collateralize to get a secured loan. Other examples include cars, bank savings, and investment margin accounts. To borrow against your car, you can use a car title loan.

These are different from an unsecured loan because your lender has no collateral. As a result, there is more lender risk with an unsecured loan if you default on your debt payments. To compensate for this risk, unsecured loans have a higher interest rate. Unsecured loan examples include credit cards, student debt, and personal loans. Continue reading to learn more about secured loans and how to get one.

Home Equity Loans and 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

If you are a homeowner and you are looking to borrow money, you have two main options to borrow from your home equity.

  • 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.

What is home equity?

Home equity is how much of the home you own. It is the difference between the market value and total amount of money that has been borrowed against the home. Home equity can be positive or negative, depending on whether the home's market value is more or less than the amount of money that has been borrowed.

Most likely, your home equity will increase over time due to paying off your mortgage and increases in the home value. You can borrow from your home equity to finance a business or second home. You can also use it for retirement income through a reverse mortgage.

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.

HELOC Approval Process

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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.

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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
TermLongShort
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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