If you have owned your home for many years, there is a good chance that the value of your home has increased significantly over the years since you bought it. In fact, across the entire country the average rate of house prices have increased by about 4% every year for the last 60 years!
This growth in your home equity is one of the major benefits of homeownership. When asked about why they would rather own a home than rent, most Canadians site 2 things as their primary reasons for wanting to own.
- This growth in equity, being able to pay down their mortgage and seeing an appreciation in the value of their home
- Having the security of living in your own home and being in control, and not having to worry about being evicted by a land lord, who may want to sell, or move into the property themselves, or have a family member move in.
These 2 reasons are why most Canadians chose home ownership as being the best for them!
For many Canadian households, their home equity is their greatest asset, this is where most of their wealth lies, and having this equity is great, but accessing that home equity and putting it to use is often overlooked when putting together a comprehensive financial plan.
What good is this equity if it is just sitting there and you are not taking advantage of it?
What is Home Equity?
Before moving further, we will take a few minutes to define and clarify home equity, for those that are not 100% clear on what it actually is and means.
Home equity is the actual market value of your property minus what you owe, in the form of a loan or a mortgage.
As an example, if the market value of your home is $700k, and you owe $100k you have $600k in equity in your home.
This means, that if you were to sell your home, you would walk away with $600k (minus fees) of cash in your pocket.
Now, if you aren’t interested in selling your home but you’d like to be able to access the equity you have built up over the years, for whatever reason, you’ve come to the right place.
There are 4 basic concepts or ways that you can access your equity.
Conventional Mortgage Refinance
Assuming you qualify for the mortgage, most lenders will allow you to borrow up to 80% of your property’s value through a conventional refinance.
If your property is worth $500k and you owe $300k on your existing mortgage; the maximum mortgage that you could have is 80% of the value (80% of 500k), assuming you could qualify, that equates to $400k. But you already owe $300k, so the amount of additional equity that you could take out by refinancing would be $100k (less any fees to break your mortgage) to spend however you like.
What if you don’t owe anything? Even if you paid off your mortgage years ago and you own your property with a clear title (no mortgage), you can secure a new mortgage to your property. The same rules apply, up to 80% of the value of the property.
If you are a Canadian homeowner who is aged 55 or older, a reverse mortgage allows you to turn the equity in your home into tax-free cash. There is no income or credit verification, you maintain ownership of your home, and you aren’t required to make any mortgage payments. The full amount of the mortgage will become due when you decide to move or sell.
Unlike a conventional mortgage refinance, reverse mortgages won’t allow you to borrow up to 80% of your home equity. Rather, a lesser amount of equity can be accessed. The amount will depend on your age.
The qualification guidelines and policies are far more relaxed then the requirements of a Conventional Mortgage. The interest rates for reverse mortgages can be slightly higher than the best rates currently being offered through standard mortgage financing, however depending on your situation, this may seem to be a fair trade off for the more relaxed qualification requirements as well as the benefit of not having to make any payments.
Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit allows you access to the equity you have in your home, with the requirement/ obligation of paying only the interest on the amount that you use. Qualifying for a HELOC can be tighter than for conventional mortgages and reverse mortgages. a Home Equity line of credit component can only be a maximum of 65% of the value of your property.
In order to maximize the amount of equity that they can take out, many home owners will do a combination of a HELOC and a standard mortgage. So long as the value of the HELOC does not exceed 65% of the value of the home, if you are getting a combination mortgage and HELOC, the total loan to value can go to 80%. 65% of it being in the form of a HELOC and the remaining 15% will be in the form of a mortgage, with an amortization and term period.
Second Position Mortgage
If you already have an existing mortgage, and you still need access to cash before your mortgage term is up, and the cost to break your mortgage is really high, a second mortgage option might be worth considering.
A second mortgage typically has a set amount of time you have to repay the loan (term) as well as a fixed interest rate (usually higher than conventional financing). After you have received the loan proceeds, you can spend the money any way you like, but you will need to make regular payments on the second mortgage until it has been paid off.
If you’re looking for a way to access the equity in your home the above 4 options may work for you. It is important to understand each of them as they all come with some benefits and some costs. Above all, what you qualify for will have some impact in your decision.
Feel free to contact us anytime. You’ve got options and we are here to help you understand them.
RBC Mortgage Employee Pricing Mortgage Rates
The truth is the big banks have a substantial advertising budget, a budget that small business owners such as myself will never have. They are sinking thousands of dollars into the common message with the intent of getting consumers to focus on one single aspect of a mortgage, and that is the rate. Some people may argue that price is the most important thing to consider.
Bank of Canada Rate Announcement
This regular and predictable recent trend provides such great opportunities for re-finance, renewal and new mortgage funding. This year it may prove to be extra special as you can throw the extra incentive of the Bank of Canada’s Announcement of a rate drop, and still further cuts expected.
Employment status Impacting Your Mortgage Qualification
Regardless how you feel about the security of your position, it’s what can be proven on paper that matters most. Even if your employer has raved about how valuable of an employee you are, and even though you are on probation technically, you can rest easy because you aren’t going anywhere; or although on paper your hours are not guaranteed, in reality you will be working full time hours the bare minimum.
Access your Home Equity
If you have owned your home for many years, chances are, its value has increased significantly over the course of the years. One of the major benefits of homeownership is your ability to build equity. This growth in equity, as well as having the security of living in your own home (not being evicted by a land lord) are two of the biggest reasons most Canadians believe homeownership is the best choice for them!
Annual Property Assessment and Property Taxes
Since the property assessment has a big impact on the amount of property tax you pay, it is the primary reason why I am frequently asked how the property assessment is computed as individuals marvel why the quality is short of what they think they could offer their home for.
If you would like more information or a free consultation contact Aleem below, and as a Certified Mortgage Specialist let me help you get the home of your dreams. Great Mortgages, Made Simple