There are many benefits that come with home equity loans in Canada and many people often tout being approved for one, even with bad credit, as being one of them. While this is partly true, because these loans primarily rely on the amount of equity a person has in their home, bad credit will affect a person’s chances of being approved for a home equity loan, and it will definitely make a difference in the final terms of the loan.

It is extremely rare that a bad credit score will actually prevent someone from getting a home equity loan; typically a homeowner only needs to have about 20% equity in their home before they can begin borrowing against it. However, that does not mean that they’ll be eligible for the entire 80% of equity that home equity loans in Canada are allowed to cover. When a person has bad credit, the lender will generally offer them less for the loan. So if a person has 20% equity in their $200,000 home, they have $40,000 in equity and would generally be eligible for a $32,000 home equity loan. If however, that person has bad credit and the lender will only allow them to borrow 30% of their equity, rather than 80%, the loan would only be for $12,000. This difference is huge, and is why it’s so important to know how bad credit will affect your home equity loan.

So what are lenders looking for in terms of credit score for home equity loans in Canada? A score of 600 is about as low as you can go without seriously decreasing the amount of equity you’ll be able to borrow against. Generally, if your credit score is 700 or higher, lenders consider this to be very high and so will usually offer the full 80% allowed for the loan.

In addition to not being eligible for the full 80%, a bad credit score will also affect the interest rate you’ll pay on a home equity loan. When a person has bad credit, to lenders it means they’re more likely not to pay bills on time and to default on loans than a person with good credit is. Because of this, loaning to bad credit borrowers is a much bigger risk for lenders and to make up for that risk, they’ll charge a higher interest rate on the loan.

It’s a misconception that a bad credit score won’t affect your home equity loan at all. While it probably won’t prevent you from securing the loan, it will greatly affect how much you’ll be able to borrow and the interest rate you’ll pay. It is crucial that any homeowner considering a home equity loan first get copies of their credit report from the three major credit reporting agencies and correct any errors that may ultimately affect their home equity loan.