In 2018, Canadian homeowners had an average of 75% home equity available to them. Little surprise then that one-in-ten decided to take advantage with a home equity loan, up from 9% the year before. With the average Canadian home equity loan valued at $75,000, Canadian homeowners are increasingly taking advantage of the available cash tied up in their property.
Using equity tied up in your home to improve the overall value of your home is a sensible way to invest in your own future. The most direct way to increase the value of your property is to renovate it periodically and keep on top of any required repairs.
A standard kitchen refit can add over 70% of the cost to the value of your home, as can upgrading the exterior panelling and features. Energy-efficient renovations, such as the installation of new insulation, provide a trifecta of potential cost benefits; lowering taxes, lowering monthly energy costs and increasing property value.
By far the most common reason for taking a home equity loan in Canada is to create further investments or to take advantage of an investment opportunity.
While the long-term goal of investing is always to get back more than you put in, you need to compare the timeframe of your loan with the expected timeframe of returns from your investment. Where possible, monthly/quarterly/annual returns on your investment are preferable to help with the repayments on your loan. If it’s going to be several years before you see a return from your investment take extra care to ensure that you can accommodate the additional repayments from your monthly budget before you take them on.
With the standard Canadian household debt now exceeding 170% of household income, home equity loans have increasingly become a route for consolidating debt under a single arrangement. Providing a better interest rate than the individual loans, debt consolidation gives homeowners more control over their debt. It also allows them to maximize the ratio of their repayments, increasing how much of each payment goes towards the principal debt, rather than interest on that debt.
Defaulting on a mortgage risks the loss of that property. Using the equity tied up within it to help get your finances in order, so that never happens, is a sensible option to protect your assets.
A second property can have many benefits, not least of which is the opportunity to open up a new line of monthly income.
Buying a second property with the explicit intention of renting it out long-term can provide enough monthly income to cover repayments on the initial loan. It’s always worth considering in advance what additional hidden fees there might be with becoming a landlord. Whether you go down the traditional private renting route or a more modern option such as Air BnB, there can be additional costs such as insurance and tax status changes to be mindful of.
While the reasons given here are some of the most common, and the most beneficial to your personal finances, there are of course many reasons that people take out home equity loans that aren’t as beneficial. The two we see most often are luxury items that will depreciate in value and, conversely, everyday expenses such as groceries, gas, utilities and bills.
Taking a home equity loan out to pay for a luxury holiday, buy expensive clothes or the latest technology removes value from your home and places it in something that won’t grow that value. If your budget doesn’t stretch to paying for groceries and utilities, a home equity loan isn’t going to fix that (unless it’s used to free up monthly cash by restructuring debt.)
At Canadalend our experts are independent. That means they’re focusing on what is best for you, not what’s best for the bank they work for. The advice they give you, and the products they suggest, are for your benefit, not so they can meet a monthly KPI.
With access to hundreds of different lenders, and a multitude of different products, such as home equity loans, our experts can help you find the product you need to achieve the aims you have for your future financial wellbeing.
To find out what options might be available to you for refinancing your mortgage, contact contact Canadalend.com today and start a conversation about saving money.