Smart ways to use your home equity

Equity is the difference between how much you owe on your mortgage and the assessed value of your home. If you’ve been fortunate enough that your home has increased in value since you bought it, congratulations! You’re doing it right! Between the increased value of your home and paying down your mortgage, you probably have a decent amount of equity in your home available for your use.

One way to realize this equity is to sell your home. Although you’ll typically have to a pay a number of fees associated with moving and selling, you still get to pocket the equity if you are able to sell your home for fair market value.

There are a few other ways to access your home equity, the most popular being through a Home Equity Lines of Credit (HELOC), a Home Equity Loan, and refinancing. According to the latest Annual State of the Residential Mortgage Market in Canada report, “survey data indicates that nine per cent of all homeowners (860,000 out of 9.86 million homeowners) took out equity from their homes or increased the amount of the mortgage principal within the past 12 months. . . . The total amount of takeout is estimated at $41 billion, and the average amount of equity takeout is estimated at about $47,600. Out of the $41 billion, $30 billion was via increases to mortgage principals and $11 billion was via HELOCs.”

You shouldn’t cash out just because the money is available, but if you have some life plans that you’ve been considering (or delaying), using your home equity could be a smart way to make them happen. Here are some smart ways that you can use your home equity to improve your lot.

  1. Renovation
Renovating is a popular, if not the most popular, reason why homeowners tap into their home equity. Of the $41 billion in equity taken out in 2016, it's estimated that $12.8 billion (31 per cent) would be used for renovation or home repair, according to the survey. One reason is that renovation is costly and it can take a long time to save up a large, lump sum of money – especially when estimated costs often reach far and above what home owners originally budget. There’s also a sentiment shared among some homeowners and experts alike that using your home equity to renovate your existing home is a smart move because by making your home more comfortable, functional, and aesthetically pleasing, you'll be increasing home value anyway, therefore creating more equity. With a line of credit, you can even take out money as you need it as opposed to one lump sum, which can make managing a big project much easier.


  1. Paying down debt
Taking equity out of your home can seem like borrowing from Peter to pay Paul, but it can be a wise choice. Homeowners indicated that $11.6 billion (28 per cent) of Canadian home equity accessed last year would be used for debt consolidation or repayment, according to the survey. If you are able to refinance, for example, and get a lump sum of money at once, then you can put that toward any unsecured debt that you may have, saving you thousands of dollars in interest over the long run. Unsecured loans – loans that aren’t tied to a particular asset – carry notoriously high interest rates, and you’re usually able to take money from your home at a much lower interest rate. The caution here, however, is that you’re then at risk of running up the unsecured debt again. Getting a clean slate is a good idea if you have your spending under control; otherwise you could just making it easy for yourself to repeat old debt patterns. Before you go this route, make sure that you have a solid budget and financial plan for moving forward.


  1. Education
If you need money to get a degree or professional certificate in order to further your career, taking money out of your home in order to do so could be a good idea, especially if the completion of the program would increase your professional opportunities and/or earning potential in the future. Financing a child’s education entirely, however, is a different kettle of fish. If doing so would cause you to have to delay your retirement or make other investments necessary for your future, then it could be a very risky move.


  1. Buying property
Many people get into property investing by using the equity in an existing property to become property investors. This can work if the amount of money is enough to meet the requirements for getting a mortgage on a second property as well as doing any renovations that need to be done before it’s ready to be rented. The key here is to make sure that the property is cash flowing quickly to make sure that you can pay yourself back within a reasonable period of time.


There are other reasons to use the equity in your home that aren’t as sound. Some people may be tempted to use the money in order to invest, for example. In fact, it’s estimated that $9.1 billion (22 per cent) of the home equity used in 2016 was for investments, according to the report. That's not to say that using the money to invest is never a good idea, but the problem with this is that with most investments, you’re not guaranteed a specific rate of return, and therein lies the risk.

Remember, though, that using your home equity isn’t free money; you do have to pay it back, so you really only want to use it for things that are going to benefit your bottom line. Not to mention that, unlike using a credit card, taking a loan against your house and defaulting on paying that loan back can result in you losing your home. If you do use some of your home equity, be cautioned not to scrape the bottom of the barrel. The equity in your home is a safety net for anything from a downturn in home values to capital in an emergency situation. It can be a great resource if used wisely, so you want to make sure that you have a plan in place to pay it back. Using home equity to go on vacation or take care of your day-to-day expenses can bite you in the end if you’re not careful.


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