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Home Equity Loan: What Is It, How It Works & How to Get One

If you’re a homeowner in Canada looking to tap into the value you’ve built up in your home, a home equity loan can feel like a financial lifesaver—or at least a good option to have in your back pocket. But what is a home equity loan, really? And how does a home equity loan work in practical, day-to-day terms? Let’s take a look at how an equity loan can help you leverage your home’s value for big life goals, from renovating your kitchen to paying off debt or even funding a small business.

In this article:

What Is a Home Equity Loan?

We all know what a traditional mortgage is, but what is a home equity loan, and why is it so popular among Canadians? Simply put, a home equity loan (sometimes also referred to as an equity mortgage) is a type of mortgage that lets you borrow against the portion of your home you actually own. If you purchased your property years ago and have paid down a chunk of your mortgage, your equity in the home has likely grown. That equity can be turned into cash through a home equity loan.

A home equity loan usually comes with a fixed interest rate. This means you know exactly how much you’ll owe each month until the end of the loan term. It’s a pretty straightforward setup, and many Canadians love the predictability. If you’re looking for more details on how to unlock your equity, check out our page on equity mortgages.

How Does a Home Equity Loan Work?

So, how does a home equity loan work when you actually sit down to sign the papers? Essentially, a lender will look at how much equity you’ve built in your home (the difference between your home’s current market value and what you still owe on your mortgage). They’ll determine a loan amount based on a percentage of that equity. You’ll typically receive your borrowed amount in a lump sum.

Once the money’s in your hands, you can use it for a variety of purposes: consolidating high-interest debt, funding a renovation, or even starting a business. As for repayment, you’ll pay off both interest and principal on a regular schedule—usually at a fixed interest rate. 

Home Equity Loan vs. Mortgage: Understanding the Differences

It’s easy to mix up home equity loan vs. mortgage because both involve borrowing money in relation to a home. Think of a traditional mortgage as your initial home-financing tool, while a home equity loan is a secondary method of accessing funds once you’ve built up equity in that home.

  • Primary Mortgage: Used to purchase your home in the first place.
  • Home Equity Loan: Used to borrow additional funds after you’ve built enough equity in your home.

Note: The interest rates on a home equity loan can be higher than on a primary mortgage. However, they’re often still lower than the rates you might pay on credit cards or personal loans. Want to explore more financing differences? Have a look at our Alternative Lending vs. Traditional Lending Guide to see which path might suit you best.

Home Equity Loan vs. HELOC: What’s the Difference?

When people talk about borrowing against their home’s equity, they often weigh the pros and cons of a home equity loan versus a HELOC (Home Equity Line of Credit). Although both options fall under the umbrella of an equity mortgage, they each have unique features that might appeal to different homeowners. Here’s a quick rundown:

  1. Payment Structure
    • Home Equity Loan: You receive a lump sum all at once, with fixed monthly payments at a (usually) fixed interest rate. If you’re looking for predictability and a set repayment schedule, this is a great choice.
    • HELOC: Think of it like a credit card secured by your home. You have a revolving line of credit and only pay interest on the amount you actually use. Monthly payments can vary, and rates are often variable.
  2. Interest Rates
    • Home Equity Loan: Typically comes with a fixed rate. That means you’ll know exactly how much you’re paying each month.
    • HELOC: Usually a variable rate, which can fluctuate. When rates are low, your payments might be lower, but if they climb, your budget might feel the pinch.
  3. Usage Flexibility
    • Home Equity Loan: Ideal if you need a specific amount of money for a one-time expense—like a major renovation or debt consolidation.
    • HELOC: Better suited for ongoing expenses or projects where costs might roll out over time (such as multiple home improvements or business start-up costs).

Understanding what a home equity loan is in relation to a HELOC is key. If you’re comfortable with a set, predictable payment plan, a home equity loan can offer peace of mind. But if you need more flexibility and think you’ll dip into your available funds gradually, a HELOC might fit the bill.

Who Can Benefit from a Home Equity Loan?

Not sure if a home equity loan can really apply to your situation? Generally, you’ll need a decent credit score and enough equity built up in your property. If you’re worried about your credit history—or if your financial situation is a bit complex—The Mortgage Station can help you navigate the system and connect you with lenders who understand your goals. It never hurts to ask a few questions and explore your options, especially if you want to tap into that hidden value in your home.

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Equity Loan Eligibility: How to Qualify

When you’re aiming for a home equity loan, here’s what most lenders typically look for:

  1. Sufficient Home Equity
    • This is your ticket to securing the loan. The more equity, the larger the potential loan amount.
  2. Stable Income and Good Credit
    • Lenders want to see that you can manage monthly payments. That’s where good credit and a steady income come into play.
  3. Reason for the Loan
    • While you technically can use your home equity loan for anything, having a solid plan (like home improvements or starting a business) can boost your chances of approval.

How to Get a Home Equity Loan: Simplifying the Process

  1. Assess Your Financial Goals
    • Are you looking to renovate? Pay off debt? Start a new venture? Clarifying your purpose will help you understand how much to borrow.
  2. Reach Out to a Broker You Trust
  3. Check Your Home’s Current Value
    • A professional appraisal might be required. This step confirms just how much equity you have to work with.
  4. Apply and Provide Necessary Documents
    • Expect to show proof of income, a list of assets, and details about any outstanding debts.
  5. Review the Loan Terms
    • Read through everything carefully. Ask questions if any part of the contract feels confusing. This is your financial future—don’t sign without being sure.

Ready for an Equity Mortgage? Reach out to our expert team of mortgage brokers!

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Is a Home Equity Loan Right for You?

In many cases, a home equity loan is an excellent choice if you need a sizable amount of money and prefer predictable monthly payments. That said, it’s always good to compare home equity loan vs. mortgage refinancing options, especially if interest rates are in flux. If you’re not sure where you stand, The Mortgage Station can help you weigh the pros and cons.

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Key Considerations Before Deciding on a Home Equity Loan

Even if you’ve figured out how does a home equity loan work, there are still a few important factors to mull over before moving forward:

  1. Your Long-Term Financial Goals
    • Are you looking to consolidate debt, fund a renovation, or invest in education? A home equity loan is best used when you have a clear, well-defined objective.
  2. Loan-to-Value Ratio
    • How much you can borrow often depends on how much equity you have. Lenders typically cap loans at a certain percentage of your home’s market value. Make sure you have enough equity to cover your needs without overstretching your finances.
  3. Interest Rates & Fees
    • While many home equity loans come with competitive rates, you’ll want to compare those rates to alternative loan products—or even weigh home equity loan vs. mortgage refinancing. Don’t forget to watch out for closing costs or legal fees that might chip away at your funds.
  4. Risk of Using Your Home as Collateral
    • Any equity mortgage places a lien on your home. If you’re unable to keep up with payments, you could be at risk of foreclosure. Make sure the repayment timeline and monthly payment fit comfortably within your budget.
  5. Future Home Sales
    • Planning to move in the near future? A home equity loan might complicate your sale or reduce your home’s net proceeds. Consider whether it makes sense to borrow now if a big move is on the horizon.

Bottom line: Before locking into a home equity loan, take a moment to look at your broader financial picture. Consider how this equity mortgage will serve your immediate needs—and how it might fit into your long-term plans. If you’re still unsure, reach out to The Mortgage Station to get personalized guidance from a dedicated, knowledgeable team.

Your Next Steps: Chat with The Mortgage Station

Ready to see if a home equity loan lines up with your financial goals? Or maybe you have questions about how does a home equity loan work in your unique situation? The Mortgage Station has friendly, knowledgeable mortgage professionals who can guide you through your options—without all the stuffy jargon.

Whether you’re deciding between a home equity loan vs. HELOC or want more info on equity mortgage strategies, our team is here to help you make a confident decision and get a competitive rate. You’ve got options—why not make the most of them?

by | Jun 10, 2025 | Uncategorized