Both a bank mortgage and an equity mortgage are secured by your home. The difference is in what the lender relies on to say yes, and that shapes everything else: who gets approved, what it costs and how flexible the terms are.
What each lender relies on
Traditional (bank) mortgages
Banks qualify you mainly on documented income, debt ratios and credit. You also need to pass the mortgage stress test, which checks you could afford payments at a higher rate. The property matters, but a strong home can’t make up for income that doesn’t fit the formula.
Equity lending
Equity lenders put more weight on the property and your equity, and on whether the plan for the money makes sense. They still look at income and credit, but they can accept situations a bank’s formula can’t, like income that’s real but hard to document.
Side by side
- Approval: banks need strong documented income and credit; equity lenders need strong equity and a sensible plan.
- Rate: banks are usually lowest; equity lenders are higher.
- Fees: banks rarely charge lender fees; equity lenders often do.
- Term: banks commonly offer five-year terms; equity lending terms are often shorter.
- Maximum borrowing: both set limits based on the home’s value, and equity lenders may set lower limits for unusual properties.
- Flexibility: equity lenders can be more flexible about income proof and credit history.
Which one should you choose?
If a bank will approve you on terms that work, a bank mortgage almost always costs less. Equity lending makes sense when:
- Your income is real but difficult to prove. See equity mortgages when income is hard to prove.
- Your credit had a setback that’s now behind you. See equity mortgages after a credit setback.
- You’re retired with a valuable home but modest income. See equity mortgages for retirees.
Using one to get back to the other
Many people use an equity lender for a term or two, then move back to a bank once their income documents or credit catch up. See moving from an equity lender back to a bank.
Get the comparison for your situation
A licensed mortgage broker can check bank options first, then equity options, and show you the difference in cost.
This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.