How Does Equity Affect Your Private Mortgage Loan?

May 17, 2022

Key points:

  • Equity is the market value of your home minus any debts secured against your property. Equity is a big part of how a lender considers your private mortgage application.
  • A loan-to-value ratio is the percentage of the property occupied by mortgage debt. Private lenders like to cap this ratio at 80 per cent.

How does equity affect your private mortgage loan?

In today’s video, we talk all about equity. Understanding equity is a big part of applying for a private mortgage, as it helps determine the risk of the mortgage and the interest rates you may have as a borrower.

You can also review the complete private mortgage guide for more detailed information!

Don’t feel like watching? Find the full transcript below!

Chris: [00:00:00] Today we’re going to talk all about equity. Now, equity is a really important concept when you are applying for a private mortgage or home equity loan, because equity really represents the security that the lender has when giving you money, and also helps to determine how much risk is associated with the particular mortgage and therefore determines the interest rate in the fees that you will end up paying for your private or home equity mortgage.

Defining equity and your home’s value

Chris: [00:00:32] So first off, we should define exactly what equity is. It’s a pretty simple concept and you may already understand, but just to be sure, it is the market value of your home minus any encumbrances or mortgages or debts that you have secured against your property and the delta, the difference between those two values, is your home equity. So first of all, let’s first talk about how the value of your home is determined. Of course, there’s a lot of information available to us, but what lenders rely upon more than anything else is an appraisal performed by an accredited appraiser. Then, when it comes to the debts secured against your property, we’re talking about existing mortgages. You could have a first mortgage or a second mortgage already, and also those secured lines of credit.

Loan-to-value ratios

Chris: [00:01:23] Once we’ve established how much equity is available in your property, we can then start to talk about an important concept which is loan to value. And the loan to value is a measurement that helps lenders determine exactly how much mortgage money will be made available via a home equity loan. In its simplest form, loan to value is just exactly what percentage of a property is encumbered by mortgage debt. So, for example, if you have a 1,000,000 dollar home and a 750,000 dollar mortgage, it is deemed to have a loan to value of 75 per cent. There is a scale when it comes to loan to value. In general, private mortgage lenders and home equity lenders like to cap the loan to value of their loans at 80 per cent. There are some lenders that will go over that threshold, but of course, the higher the loan to value, the more risk, and the more risk, the higher the expense. Very comfortable loan to value for lenders is approximately 65 per cent to 75 per cent loan to value. As you get from 75 per cent to 80 per cent, you can expect to pay the highest interest rates and fees from the lender.

Chris: [00:02:42] Now, I hope today’s video was useful. If you have any questions about loan to value, home equity, or any specific questions about your unique circumstances, I’m just a phone call or an email away. Bye for now.

Need more help or information?

I encourage you to check out the complete private mortgage guide on my website, where I cover all aspects of this type of mortgage financing. 

I can help you determine if private mortgage financing is right for you. I’m just a phone call or email away. You can book a call directly into my calendar below, or get in touch with me here.


Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too. He’s a second generation mortgage broker. Following in his father’s steps he joined the family mortgage business straight out of university.