Mortgages & Financing
Refinancing
First-Time Homebuyers
How to build equity in your home, and what to do with it
Heard of home equity but not totally sure how it works? Let us help you understand and leverage your home's equity to its maximum potential.
Niamh GyulayContent Marketing Specalist
4 min read
You may have heard of the importance of building your home equity when planning your financial future, but if you’re like many first time Canadian homebuyers, you may not even know what that means. We’re here to tell you exactly what home equity is, how you can really take advantage of your home equity, and make it work for you.
What is home equity?
Home equity is the full value of your home, minus the balance of your mortgage. For example, if your home is worth $500,000, and your mortgage balance is $300,000, you have $200,000 in home equity. To determine what your home is valued at - and furthermore, what amount of home equity you have - an appraisal is usually required. Your home equity can fluctuate as you pay down your mortgage, take additional loans out that are secured by your home, or if over the course of your ownership of the home, the value goes up. Often, lenders will consider what the value of your home is when deciding how much you could potentially borrow. You can access a maximum of 80% of your home’s appraised value.
What am I supposed to do with my home equity?
There are so many options when actually utilizing your home equity, but the bottom line is no matter what you use it for, you’ll need to access it through a HELOC (home equity line of credit) or through a cash-out refinance model. Once you’ve done that, your home equity can work for you in any way you want. The best and most effective options for leveraging home equity are making home improvements, or paying down debt with a lower interest rate. Mortgages usually have low interest rates compared to other forms of financing, so it is sometimes wise to take out a loan with your home equity rather than, say, with a bank. That way, you make one payment with a lower interest rate, rather than a lot of little payments with high interest rates.
How do I increase my home equity?
While “increasing home equity” sounds intimidating and complicated, in reality, it is pretty simple. First and foremost, you can pay down your mortgage, thus making the difference between the amount owed and the amount appraised greater. Therein is your greater home equity. Second, you could very intentionally increase the value of your home through home improvements and renovations. This is an investment in itself, but if you’re replacing ancient pipes, waterproofing the basement, or installing a brand-new kitchen, that could significantly improve the value of your home. Finally, you could also wait for the market to appreciate. This option is highly variable, and may not be the right option if you are planning to utilize your home equity for something time-sensitive, like paying for education. While this usually happens with all properties, there is never a guarantee, and even if it is positive change, it is gradual. All of these factors can affect your home equity, but being informed can help you know all the options before making any decisions.
What should I look out for when leveraging my home equity?
Taking out a loan against your home equity is not always the best thing for your financial situation. One big thing to consider is making sure you’re using the cash from a HELOC for something that will return the cash to you. It’s important to remember that it’s great to be able to leverage your home equity, but you shouldn’t use it for daily spending or vacations, or other things that will perpetuate debt. The same goes for purchasing vehicles, a famously depreciative investment. Home equity loans should be put towards something that makes your life easier, not to increase your debt and make your life more difficult.
It is important to understand exactly how equity in your home can work for you, before choosing to take out a loan. In the best case scenario, it can consolidate debt and make the path to your financial goals all the more clear. Home equity is a reminder than homeowning is an investment that can work for you.