A mortgage is by far the most common loan choice when you’re ready to buy a house, but that doesn’t mean it’s your only option. Personal loans can be a quick way to drum up extra cash for a down payment or even to buy a smaller home. But which should you choose? Sorting through mortgages and personal loans may not be super fun, but it’s a crucial party of understanding the best financial choice for your future.
How do personal loans differ from mortgages?
There are two major differences between personal loans and mortgages. A personal loan is usually unsecured, which means that you don’t have to put up any collateral to borrow the money. The result is that you pay more in interest and have a shorter term, which is generally less than 10 years. A mortgage, on the other hand, is a loan that specifically uses your house as collateral — if you default on a mortgage, you could lose your home. The most common type of mortgage in Canada is a fixed-rate mortgage amortized over 25- years – however you can amortize your mortgage anywhere from 5- to 35- years, depending on your situation.
Main differences between personal loans and mortgages
| Personal loan | Mortgage | |
|---|---|---|
| Interest rate | Varies by lender, usually between 4% to 36% | Varies by lender, but can start as low as 2.5%. |
| Maximum loan amount | Usually up to $50,000, depending on the lender and your eligibility | Depends on income, assets, credit score, value of home and other factors |
| Loan term | Typically between 1 to 7 years | Typically 5- to 30- years, but can be up to 35- years |
| Repayment frequency | Usually monthly repayments | Usually monthly repayments, but can be weekly or bi-weekly too |
Compare personal loans from online lenders
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Compare mortgages from online lenders
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What are the benefits of personal loans and mortgages?
Personal loans
- No tax implications. You won’t be charged income tax on the amount you borrow.
- No down payment. Unlike mortgages, many lenders don’t require you to provide any cash up front in order to qualify for a personal loan.
- Negotiate repayments. You may be able to negotiate your repayments if you’re facing financial hardship or an emergency.
Mortgages
- Lower APR. Since the loan is secured with your property, lenders are more likely to offer a much lower APR than an unsecured personal loan.
- Prequalification. You can get pre-approved and go house shopping with a clear picture of what you’ll be paying every month.
- Tax advantages. Doing renovations or renting out an investment property can come with tax advantages and incentives.
What are the drawbacks of personal loans and mortgages?
Personal loans
- Short repayment terms. Most lenders have repayment terms lasting one to seven years.
- Higher interest rates. Since you’re not providing collateral, you’ll likely have a higher interest rate and will need to pay more in interest over the life of your loan.
- Smaller loan amounts. You’ll only be able to borrow up to $50,000 or $100,000 if you have impeccable credit. Otherwise, your funding will probably be limited to $35,000 or less.
Mortgages
- Foreclosure. If you fail to make repayments and default on your mortgage, you could lose your home in foreclosure.
- Amount paid. Despite low interest rates, mortgage loan amounts tend to be very large and have long repayment periods of up to 35- years. This means that by the end of your repayment period, you’ll likely have paid tens of thousands of dollars in interest alone.
- Payment fluctuations. With a variable rate mortgage, the payments you make can fluctuate drastically with the market.
Which borrowing option is better suited for me?
The better option will depend on your needs as a borrower. Mortgages are by far the most common option because they’re meant for real estate. Fixed-rates make for an easy repayment plan, even if it doesn’t have as attractive an initial interest rate as a variable rate mortgage. If rates drop significantly, you can take steps to refinance a fixed-rate mortgage to a variable rate, which could potentially lower your monthly payment if the prime rate stays low.
In addition, buying a home outright on $100,000 or less is nearly impossible in most parts of Canada these days. Some lenders will allow you to use a personal loan as a down payment, but otherwise, you’ll have a hard time covering the costs of a purchase. However, if you’re looking to fill that new home with some furniture, a personal loan is an option to consider. Personal loans can be used for many purposes, which make them useful when it comes to home improvements or other big purchases.
Bottom line
Personal loans can be good for a wide variety of things, but they’re not necessarily the best for funding the purchase of a home. Mortgages are exclusively used for purchasing real estate and can generally offer you much better terms and a lower interest rate. Before you make any big financial commitments, you should talk with a financial adviser and compare your options. Whichever you choose, have your finances in order and understand the full impact of each type of loan when you apply.
Frequently asked questions
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