Whatever you might need some extra cash for right now, there are many lending options available. And while being able to shop around is a good thing, it can also be overwhelming.
One of the key things to look for in any loan is a favourable interest rate – usually expressed as a percentage of the principal amount. Generally speaking, payday loans and credit cards have the highest interest rates, while conventional mortgages have the lowest, with other options falling somewhere in the middle. Let’s look into the interest rates offered by three popular types of loans, as well as what else you should be considering when comparing your options.
HOW ABOUT HELOCS?
Aside from a conventional mortgage, a Home Equity Line of Credit (HELOC) has one of the lowest interest rates of all lending options, typically between 3.5 and 5.5%. A HELOC is a revolving line of credit which allows you to release equity from your home by borrowing up to 65% of the property’s value.
HELOCs are a popular choice due to their low interest rate and the fact that they allow you to access your home’s equity while continuing to live there. They’re also a good choice if you want the flexibility to take out money when you need it, rather than receiving it as a lump sum or on a monthly basis.
Unfortunately, however, banks have recently become stricter about who they approve for a HELOC. To get one, you have to prove you have sufficient monthly income, a low credit score, and a favourable debt-to-income ratio – something which has led to many Canadians seeing their applications denied.
LET’S GET PERSONAL
Another popular lending option is a personal loan. These are loans which aren’t secured against an asset such as your home.
Advantages of taking out a personal loan include their versatility – unlike a mortgage or a car loan, they can be used for whatever you want, like consolidating existing debt. What’s more, the application process is usually quicker than other lending options; in some cases you’ll get the money in your bank account within a few days. Another advantage is that the interest rate is also usually – though not always! – fixed.
On the flip side, however, their interest rates are often higher than other options such as a HELOC – around 8.5-12%. On top of this, they can be hard to qualify for and have rigid repayment terms, meaning monthly payments must be made.
THE REVERSE MORTGAGE SOLUTION
Another lending option which is tailor-made for Canadians 55+ is the reverse mortgage. A reverse mortgage allows you to access up to 55% of your home’s equity without selling, and while interest rates are slightly higher than that of the HELOC – at 5-7% – they are significantly lower than other loans and offer many other benefits that make them a strong option.
These benefits include the fact that they’re easier to qualify for, as you don’t have to prove a monthly income. You also don’t have to pay back what you owe until you leave the house, taking away the stress of having to make monthly mortgage payments. Plus, the CHIP Reverse Mortgage’s No Negative Equity Guarantee means you’ll never end up owing more than the house is worth, leaving you free of financial stress to live the retirement you’ve always planned.
When looking for the best lending option, comparing interest rates is a great place to start, however they’re not the whole story. Taking an in-depth look into the pros and cons of each option will help you choose the one that’s right for you.
Written by
Augostino Tuzi
HomeEquity Bank