30 Year Home Equity Loan

30 year home equity loan amortization is now the longest amortization available to Canadians when they purchase a home with less than 20% down.

In January 2011, the Canadian Government changed the legislation to reduce the amortization from 35 years for high ratio mortgages and home equity loans.

When the mortgage balance is 80% of the purchase price or more, the mortgage is also called a high ratio mortgages. A conventional mortgage has a mortgage balance that is 80% or less of the value or purchase price and can have an amortization up to 40 years.

A home equity loan can be used for a home purchase or to refinance. Arranging a home equity loan usually only takes approximately 2 weeks. Many clients will set up a 30 year home equity loan, refinance their home to access some equity for:

  • Home Improvements/Renovation
  • Investment in Stocks or Mutual Funds
  • Investment in RRSP’s
  • Purchase a second home or vacation home
  • Purchase a rental or investment property
  • Consolidate Debt

When applying for a Home Equity Loan or mortgage most lenders will ask for the purpose of the funds. They will use this information to determine their risk and your ability to pay back the home equity loan. Even though the money you are accessing is your equity, the lender will still want to know the purpose of the funds. For example, If you are using the funds toward the down payment for an investment home, then you will have additional risk with the new mortgage and your ability to repay the home equity loan may be reduced.

30 Year Home Equity Loan: Debt Consolidation

A Home Equity Loan or mortgage is most often used to purchase a home, but can also be used to consolidate other loans and debts. If we have various high interest credit cards with balances, car loan payments, keeping this under control can sometimes get difficult. A home equity loan can erase that debt and give you a fresh start with one monthly payment.

30 Year Home Equity Loan: Home Improvement & Renovations

Another good reason for getting a home equity loan is to make home improvements. When we make improvements to our home either inside or outside, we increase our home's value. By taking a home improvement loan, we can get access to some of our equity. We can use this cash to improve our home and make it worth even more, therefore leverage the equity to increase our equity.

30 year home equity loan for renovations

A home equity loan can have an amortization up to 30 years if high ratio and up to 40 years if conventional. Within the amortization, we can choose a term from 6 months to 10 years. The term can have a fixed interest rate or a variable rate (or adjustable rate).

The longer the amortization we choose the lower the payment. If we are arranging a conventional home equity loan or mortgage, then we could also set it up as a Line of Credit. This is called a HELOC (home equity line of credit) and has an interest only payment. You are not required to pay back any of the principle!

Why would you want a 30 year home equity loan? The payment is lower with a longer amortization. A lower payment is much easier on our budget. The more time we have to pay off our mortgage, the lower our payments will be.

Aside from smaller monthly payments, a home equity loan will get much lower interest rates than with any other type of loan. The lender, or bank, is using our home as collateral. A home will generally go up in value, unlike our vehicles or RV’s or Mobile Homes. We can choose a fixed interest rate, a variable rate, an adjustable rate or a home equity line of credit. Each has advantages and dis-advantages.

Since house values usually increase over time, as we pay down our 30 year home equity loan and the value of our home increases, we can access more equity. Since the change in Canadian Legislation in January 2011, we can refinance our home to a maximum of 85% of the value. If we are purchasing a home, then we can finance up to a maximum of 95% of the purchase price (or appraised value). Visit 100 Home Equity Loan to see how to purchase with no down payment, under these new rules.

This may be a bit risky for the lender, but if he feels confident enough in your ability to make payments, you may qualify for a 30 year home equity loan.

There is always a small chance that your house will depreciate. If this happens, the lender will not come back to us and ask us to pay down the balance of the home equity loan. As long as we continue to make payments we will not have to bring the balance of the mortgage below the value of our home. Some investment loans do require this. Clients will receive a margin call if the underlying investment collateral is at a lower value than the loan. These clients will have to pay down the loan until the lender is satisfied.

Disadvantages of a 30 Year Home Equity Loan

There are really 2 disadvantages to a 30 year home equity loan.

  1. We can pay a lot of interest. The longer the amortization, the more interest is charged over the life of the mortgage/home equity loan.
  2. If we want to cancel the mortgage, or pay it off, before the end of the term there will be a penalty. The penalty is calculated as the greater of 3 months interest or IRD (interest rate differential).

In Canada, the amortization may be 30 years, but we can choose our term (6 months to 10 years). If we don’t plan to stay in our home for a long period of time, then choose a shorter term. When the term is over, we have 5 choices:

  1. Renew the home equity loan/mortgage into another term with the same lender
  2. Pay off the home equity loan/mortgage in full
  3. Transfer the home equity loan/mortgage to another lender
  4. Refinance the mortgage and access more equity either with the same lender
  5. Refinance the mortgage and access more equity either with a new lender

It may feel like we are stuck for 30 years, but we have choice and options. Even if we need to make a change within the term, we can avoid the penalty. If we are moving to another home, we can PORT the mortgage amount and term to our new home. If we do this, then we won’t have to pay a penalty. If we need more money, our lender will blend our existing rate with the going rates and we end up with a mortgage with a blended interest rate for the total amount we need.

Use a 30 year home equity loan for home improvements

Our home is your most valuable asset, for most of us. We can utilize this to our advantage to control our cash flow and grow our net worth. It is best to consult with a mortgage specialist or mortgage broker who has experience and can help you to understand your choices and options.

How to Apply For a 30 Year Home Equity Loan

The application process is basically the same whether you are applying with a lender that you know or if you are going to a new one. Here is the 7 step process to apply for a 30 year home equity loan when you wish to refinance your current home:

  1. Meet with a Mortgage Specialist/Advisor/Broker & review:
    • personal information (name, address, DOB, SIN)
    • Employment information
    • Assets & Liabilities
  2. Provide Documents to our broker
    • Income confirmation (employment letter, paystubs, NOA’s, T1Generals, etc.)
    • Mortgage Documents (information about our current mortgage(s))
    • Property details (property tax bill & tax assessment, etc.)
  3. Mortgage Broker checks our Credit & reviews our documents
  4. Lender provides a decision & completes an appraisal (an approval is what we are looking for)
  5. We sign and accept the Lender’s commitment for financing
  6. We sign documents with a lawyer
  7. Lawyer pays out all existing mortgages then advances funds to us

If we already have a relationship with the lender, they may already have most of our personal details, but we will still have to go through all the other.

If we decide to go to a different lender, for whatever reason, the process is exactly the same. The new lender will just need some information about our existing mortgage that our current lender already knows. (the balance, payments, etc.)

When we refinance our home, all lenders will want to complete an appraisal to determine the value. If our credit is very good, some lenders will complete a desktop appraisal, meaning that they will not come and look inside our home but will simply compare our home to other sales in our community and estimate the value.

Some lenders will require a full appraisal, someone will come to our home, assess our home’s condition: measure it and compare it to other homes currently for sale in our community.

What Are The Costs To Refinance?

When we refinance our home we must assess the costs and weigh the benefits of the new mortgage to keeping the existing home equity loan. The possible costs to refinance our home could include:

  • Penalty to break the current contract (3 months interest or IRD)
  • Legal Fees ($700 - $1000)
  • Appraisal Fees (approx. $300)
  • Title Insurance Fees (some lenders will ask for this (approx. $300)

If the costs are not recovered within a reasonable period of time, then we may consider arranging a HELOC (home equity line of credit) in second position instead of a new first mortgage.

An experienced mortgage broker can be a great source of information. He knows the mortgage business inside and out. A broker has access to more types of mortgages and more lenders. Together, you can review your options and choices and determine what is in your best interest.

Review your choices and options whether it’s to set up a new second mortgage or HELOC or a 30 year home equity loan.

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