Renters are shut out of one of the most powerful financial tools available to homeowners: HELOCs.Deborah Baic/The Globe and Mail
For many young Canadians, home ownership is a dream. Millennials and Gen Z are grappling with still-sky-high housing prices, rents that remain expensive despite a recent drop, and wages that haven’t kept up with inflation.
And without homes, they’re shut out of one of the most powerful financial tools available to homeowners: the home equity line of credit, or HELOC.
When you borrow to buy a house, the bank is often eager to loan you even more money through a HELOC. It’s a low-interest borrowing option that lets homeowners access tens or even hundreds of thousands of dollars on demand. And it can be a financial lifeline for car repairs, job losses, education costs and life’s unexpected emergencies.
Renters don’t have that luxury. Without a home as collateral, they’re left navigating the more expensive world of unsecured personal loans. These can be difficult to understand. Unlike mortgage rates, interest rates aren’t widely posted and it’s not readily apparent how to qualify.
This is the divide in Canada’s borrowing landscape: homeowners on one side, renters on the other.
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Ryan McKinley, senior mortgage development manager at Vancouver-based credit union Vancity, says the issue for renters isn’t just a lack of collateral. It’s also a lack of information.
“Unsecured loans just aren’t talked about the way mortgages are,” he says. “It can be intimidating.” As a result, many people don’t know what’s available or how to begin.
Eva Wong, co-founder and COO of fintech provider Borrowell, which specializes in low-cost personal loans and free credit scores, says 88 per cent of the platform’s users aged 20 to 39 don’t have a mortgage. Among that group, 65 per cent carry a personal loan, line of credit, or both.
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Younger Canadians without homes are taking out personal loans for a variety of reasons. Some borrow to consolidate debt or cover emergencies such as car repairs or job losses. Others use personal loans to fund going back to school, starting a business or major life events such as a wedding.
A 2020 study by credit-reporting agency TransUnion found that 16 per cent of Gen Z adults in Canada (born after 1994, in the study) held a personal loan – four times the percentage in the U.S. For this generation, personal loans ranked as the third most common form of credit after credit cards and student loans, and they continue to be a popular way to borrow. In 2024, the number of Gen Zers in Canada taking out personal loans rose 28.7 per cent over the previous year, after increasing 31 per cent year-over-year in 2023, according to figures provided by TransUnion.
So what do you need to know before applying for a personal loan? First, understand that the interest rates will be a lot higher than a HELOC.
According to figures provided by National Bank, unsecured personal loan rates average from 8 to 12 per cent, though the bank stresses rates vary based on an individual’s financial situation. By contrast, as of June, National Bank’s HELOC variable rate was 5.95 per cent.
But that’s only part of the picture. Homeowners with HELOCs can often make interest-only payments, keeping their monthly costs low. Personal loan payments, on the other hand, cover both interest and principal, which can substantially increase monthly expenses.
An example from Ratehub.ca illustrates this point: A renter earning at least $100,000 per year with a very good credit score (725 to 759) could currently expect to pay a minimum of 8.99 per cent interest on a $25,000 unsecured personal loan. Monthly payments would be $519 for the five-year term.
A homeowner borrowing the same amount through a HELOC at a current 5.45 per cent interest rate would only need to make monthly payments of $114.
Before taking out an unsecured personal loan, financial experts say it’s important to ask whether borrowing is truly necessary. Ideally, you’ve built an emergency fund for unexpected expenses.
If not, family help may be your next best option, says Alim Dhanji, senior financial planner at Assante Financial Management in Vancouver. The Bank of Mom and Dad likely won’t charge you interest and may offer flexible repayment terms. That alone can save you hundreds or even thousands of dollars.
If you do need to turn to a bank, experts say preparation is key. Start by checking your credit score. It’s a major factor in determining whether you’ll be approved and what your rate would be.
According to credit-reporting agency Equifax, a score of 660 to 724 is “good” creditworthiness,725 to 759 is “very good,” and 760 and above is “excellent.”
Next, build a case for your loan, why it’s needed and how you’ll repay it, Mr. Dhanji says. Creating a basic budget or cash-flow statement that outlines your income, expenses and savings can go a long way in reassuring a lender. It may even help you qualify for better terms.
“You want to show the bank that you can repay this loan and help build your case to get a better interest rate,” he says. Having a loan co-signed by a property owner (hello, mom and dad again) may help lower your rate, too.
As for those interest rates, a good place to start comparison shopping is Ratehub.ca. It tracks interest rates for personal loans, though doesn’t distinguish between secured and unsecured lending.
Natasha Macmillan, senior business director of everyday banking at Ratehub, says many people focus on the total loan amount but overlook how much it will cost them. “Think about what you can realistically afford to pay every month,” she says.
Understanding the fine print of a loan is equally important. Some loans come with upfront fees (typically called administration fees or origination fees), and others have penalties for early repayment.
If you plan to pay off the loan ahead of schedule – say, with a year-end bonus – make sure the lender doesn’t charge you extra for doing so, says Tyler Thielmann, president and CEO of Vancouver-based fintech provider Spring Financial.
Also keep an eye out for loan products that fit your needs. These may offer lower rates or more flexible terms. Banks have specialized loans for consolidating debt, buying a car or paying for school.
TD’s student line of credit, for example, lets you withdraw funds as needed and pay only interest while studying, with repayment starting after graduation. Vancity offers a “Planet-Wide Transportation Loan” for those buying electric vehicles or e-bikes.
But avoid applying for multiple loans at once in hopes of finding the best deal, says Borrowell’s Ms. Wong, as each application triggers a “hard hit” on your credit score.
If lenders see too many of these in a short time, they may assume you’re in financial trouble, which could affect your ability to get a loan or raise your interest rate, she says.
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One alternative to a personal loan is an unsecured line of credit, which allows you to tap funds as needed, just like a HELOC. As of April, the average rate for an unsecured line of credit from a chartered bank was 8.32 per cent, according to the Bank of Canada.
A line of credit can be ideal for filling emergency needs such as car repairs. “You don’t have to reapply each time you need the money. It’s there, ready to use,” Mr. McKinley at Vancity says. Plus, it’s less expensive than putting big expenses on a credit card, which comes with hefty double-digit interest rates.
But discipline is crucial, Mr. McKinley says, noting it’s easy to let an open line of credit become a crutch for everyday spending. He suggests resisting that temptation and using it only for genuine needs – then, as with any loan, paying it down as quickly as possible to avoid long-term interest costs.
