One of the main reasons Canadians choose to buy property is because it is an investment in the future. Instead of spending years watching your money disappear paying rent, a mortgage is a great way to ensure that at the end of the process you have an actual asset to show for it.
What many homeowners don’t realize is that from the moment you make your down payment, you own part of that asset outright. And as you continue to make your monthly payments and market forces cause your property value to increase, your share — your equity — in that asset continues to grow.
Though some homeowners simply want to pay the mortgage off as quickly as possible, there are many situations in which it can actually be more responsible to tap into this home equity rather than taking out an unsecured loan.
Before you start exploring your options for how you can use this equity, however, you will need to understand how much equity you have built up.
How to Calculate Your Home Equity
Home equity is a fairly simple equation, and most homeowners can get a rough estimation of how much equity they currently have using a few simple calculations, or by getting in touch with a mortgage broker like Burke Financial that specializes in residential clients.
If you want to work it out for yourself, all you need are two pieces of information: the amount of your mortgage yet to be paid, and the current market value of your home. Equity is current market value minus remaining mortgage.
For example, if you took out a mortgage for $600,000 five years ago, and you currently owe $500,000, but your home is now worth $700,000, you own $200,000 worth of equity in the home. Basically, this means that if you sold the house today, you would have $200,000 in profit.
But as we shall see, you don’t actually have to sell the home to be able to put this equity to work for you.
How to Get the Most Out of Home Equity
Smart financial planning is all about putting your money to work for you. Just as it doesn’t make sense to sock your life savings away in a chequing account where interest will barely keep up with inflation, it also doesn’t make sense to ignore your home equity, especially if the alternative is taking on high-interest debt.
Strategically using your home equity means that you can borrow against an asset, rather than taking out an unsecured loan. This allows you to get a lower interest rate, even if your credit score is below 650.
Borrowing against your home equity through a home equity loan or second mortgage is a great way to fund improvements, repairs, and home renovations that will bolster the value of the property itself, or to consolidate other forms of debt like credit cards into a single, lower-interest payment.
Canada’s booming real estate market means that house prices in every major city have been rising steadily, and if you’ve been regularly paying your mortgage for years, you might be surprised by the amount of equity you have built up.
If you need funds for debt consolidation, renovations, or home repairs, get in touch with a residential mortgage broker to find out how you can put your equity to work today.