How to Find Out How Much Home Equity You Have and What You Can Do With It

Mortgages can make you feel like you've taken on a lot of debt when you purchase a home. The truth is that you should also consider the value of your new home along with the amount you paid for it to get a clearer picture of your finances. As the value of your home roughly equals the value of your mortgage debt, your overall wealth has not changed significantly.

Home equity is a useful way to assess how much wealth homeowners have in their properties. So how does home equity stack up, and for what purposes is it useful? No matter how you utilize your home equity, homeowners need to grasp the concept.

How does home equity work?

Equity is the personal wealth you hold in your home. To calculate your home equity, take the current market value of your home, then subtract any loans owing on it, such as your mortgage. Your home equity equals its full market value if you don't owe any money on your home.

Home equity is a useful way to evaluate the wealth you have built in your home, but most people use it when they want to borrow. In the case of a home equity loan, you can borrow against your built-up equity to get the funds you need. Common home equity loans in Canada are second mortgages or home equity lines of credit (HELOC). Here are some more details on home equity loans and what you can do with them.

Here’s How to Get Started (An Example of How to Calculate Home Equity)

For example, say your house is worth $500,000. If you had to put down $100,000 to purchase your home, you would have a mortgage of $400,000. The following items will not be included in your calculations for simplicity: land transfer taxes, GST/HST, mortgage default insurance, etc. 

How to Calculate Your Home Equity

If your home's worth $500,000, and you subtract your $400,000 mortgage, you are left with $100,000 of home equity. 

Now consider if a decade from now you reduce your mortgage balance by $100,000 to $300,000, and the value of your home has grown by $100,000 due to a strong real estate market. Here is how your equity is calculated: $600,000.00 (home value) - $300,000 (outstanding mortgage) = $300,000 (home equity).

Your home equity is not strictly based on how much your mortgage was paid off because it changes as the value of your home changes. Even though paying your mortgage directly increases your home equity, the real estate market in your area also affects your home equity. If the average price of a home in your area goes up by 10%, your home equity has just grown by 10%. Additionally, even if you keep paying off your mortgage, your home equity can also decrease over time, especially if market conditions are leading to reduced home values in your area.

How do home equity loans work?

Home equity is often used as collateral for home equity loans in Canada. Any loan that uses your home equity as collateral is a home equity loan. In many instances, home equity loans are used for large, one-time purchases such as university tuition fees, remodelling the house, or paying for medical care. In contrast to an unsecured loan, a home equity loan results in a lien placed on your house by your lender. If you cannot make your payments, your lender can take control of your home and sell it to get repaid.

A home equity loan will usually have a maximum amount that can be borrowed. This is often a percentage of your home's appraised value, usually around 80%. Your home equity loan percentage will vary based on the type of loan you use. The four most common home equity loans in Canada are listed below:

Second Mortgages

A second mortgage is what we call a home equity loan, and it is exactly what it sounds like. You can borrow part of your home equity as cash in addition to your primary mortgage. The total mortgage amount cannot exceed 80% of the market value of your house.

Compared to regular mortgages, second mortgages carry much higher rates. Second mortgage lenders fall below primary lenders in the case of a default because they are considered lower priority lenders. Consequently, second mortgage lenders are exposed to a greater level of risk.

Home Equity Line of Credit (HELOC)

You may also hear the term HELOC or home equity line of credit bundled with your primary mortgage. Rather than a lump sum of cash, the lender sets up an account you can withdraw from during the term of your mortgage. This account allows you to remove an amount at the beginning of your term, but your total credit available cannot exceed 65% to 80% of the total value of your home.

When you withdraw funds from a HELOC, you must repay the interest accrued monthly. When you use a HELOC, you remove the funds as cash rather than using them for purchases, like with a credit card. However, the rates on a HELOC are lower than those on a credit card since it is a secured loan.

Refinancing Your Mortgage

You can also access your home equity by refinancing your mortgage. Your mortgage lender will let you borrow more money when you refinance. You may borrow up to 80% of your home's total value. Your new mortgage rate may be higher than the one you paid before. Refinancing does not require you to take out a second loan.

Reverse Mortgages

Reverse mortgages can also be considered home equity loans as a specialized product. Reverse mortgages are typically used to fund retirement by elderly Canadians who lack the pension or the cash to live comfortably.

Those over the age of 55 can borrow up to 55% of their home’s total value through reverse mortgages in installments or a lump sum. The borrower does not have to make payments on a reverse mortgage until the loan is due, which occurs when the home is sold, or the borrower dies. Repayment of the loan is usually made from the proceeds of the home’s sale. A reverse mortgage will compound interest at a higher rate than both a regular mortgage and a home equity line of credit.

Accessing the Equity in Your Home

Equity in your home is only a measure of where you have assets. This is crucial since it shows you the sometimes hidden value you have locked inside your house. When you need a loan to make a major purchase or pay off debt, your home equity may be your biggest asset. To make informed financial decisions, you need first to understand what home equity is and how you can borrow against it.

For more information on home equity in Ontario, call Canadalend at 1-844-586-0713 or contact us here.