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Canada’s extraordinarily active housing market has been one of the biggest financial news stories of the past decade, and even the coronavirus pandemic has not slowed it down.
For many Canadian homeowners this massive increase in home values has functioned as a huge capital injection. The only question is, how can homeowners best take advantage of their new wealth?
Contrary to popular belief, you don’t actually need to sell your home to profit off of increases in market value. Even if you haven’t paid off your mortgage, you can borrow against the increase in your home equity to fund debt consolidation, renovations, and repairs to your home, and can even use capital raised through a second mortgage or home equity loan to invest in new properties.
In this article, we will explore some of the ways this can work for individual homeowners.
How Rising Prices Increase Home Equity
In order to understand how to take advantage of the booming estate market, it is first necessary to understand how home equity works.
Home equity is the amount of value in a property owned outright by the homeowner. It is calculated by subtracting the amount owing on the mortgage from the current market value of the home. As you make your monthly payments, that number goes up, but it also goes up as your home’s re-sale value increases.
This new home equity, which has been created by market forces, functions as collateral that can be used to get large loans with low interest rates.
The Advantages of Taking Out a Second Mortgage
The key advantage of taking out a second mortgage or home equity loan is that it is a form of secured debt. Secured debt involves less of a risk, and so the interest rates tend to be lower. When you work with a mortgage broker like Burke Financial you also have greater room to negotiation the monthly payments and overall repayment timeline.
This means you can borrow large sums of money without having to make prohibitive payments to service the debt, freeing up capital for investments that will pay dividends in the future.
For example, building an addition to your home or refinishing your basement to create a rental unit are both strategic improvements that will generate income down the road, but both require significant up-front costs in order to complete.
Borrowing against your home equity puts this money within reach, making it easier for you to grow your wealth by making a smart investment.
How to Use Your Home Equity Wisely
Home equity is a powerful borrowing tool, but getting the most out of a home equity loan or second mortgage means using the money wisely.
Taking on debt always involves a certain degree of risk, and it only makes sense to borrow against the value of your home if you are using the money to put yourself in a better financial position.
Using a home equity loan for debt consolidation, for example, will reduce your monthly payments and help you get out of debt faster. Spending it all on a new wardrobe will leave you further in debt with nothing substantial to show for it.
Though there are signs that the Toronto real estate market might be entering a cooling phase, it is clear that demand for housing in the Greater Toronto Area remains high: even if growth slows, prices are not about to drop.
If you want to take advantage of the home equity you have built up during the boom, consider getting in touch with a local mortgage broker to explore your options for a home equity loan or second mortgage.