As Canada continues towards economic recovery after the pandemic, the high cost of living and daily expenses are pressing issues for most Canadians. Many homeowners consider using their home’s equity to tackle financial hurdles and march forward.
If you’re a homeowner experiencing the same and wondering how to borrow from your home equity, we’ve got an answer. In this blog, we will explore the ins and outs of borrowing against your home equity in Canada to help you decide how this tool can help solve your financial crises.
What is Home Equity?
Think of home equity as your home’s savings account, the part you genuinely own once your mortgage is factored in. It’s like grabbing a chunk of cash tied to your home’s value, and you’ll return it at a steady interest rate over a set period, usually five to 30 years.
Using your home’s equity is like borrowing from your home’s piggy bank but with more options and flexibility.
What to Consider Before Taking Out a Loan
Before taking loans and using credit lines, it’s best to assess your financial standing. Here’s a handy checklist to help you out:
- How much money do you really need, and can you comfortably fit it into your budget?
- Think about what could happen if interest rates decide to play jump rope.
- What can you confidently fork out every month, even if rates do a little dance?
- And do you reckon some loan insurance could be your safety net in case you miss a payment curveball?
Think these over to make sure any borrowing you dive into plays nicely with your financial well-being.
How Do Home Equity Loans Work?
Home equity loans work by allowing homeowners who have been making mortgage payments to access the equity they’ve built up in their homes. As you make mortgage payments, your home ownership share slowly grows.
This equity is like a growing asset; you can borrow against it while still owning your property. In this manner, you can utilize your home’s worth for different financial requirements, even before completely settling your mortgage.
How to Determine Your Home’s Equity
If you’ve been diligently making your mortgage payments, you’ve likely accumulated some home equity along the way. Typically, you’re likely to have equity if:
- you’ve made substantial mortgage payments
- your home’s value has increased over time, or if
- you’ve made renovations that added value to your property
To get a quick estimate of your home equity, follow these steps to gain a clearer picture of your financial position.
How Much Can You Borrow?
- You typically can borrow about 80 to 85% of your home’s current value, subtracting the amount you still owe on your mortgage. But sometimes, certain lenders can be more flexible and might let you borrow up to the full amount of cash of your home’s value. Just remember to chat with your lender and get the lowdown on their rules.
Here are the benefits and drawbacks of tapping into your home’s equity, offering insights to help you decide what aligns with your financial goals and circumstances.
Pros and Cons of Using Your Home Equity
- You can use your home equity to fund renovations, enhancing your property’s market value for future resale.
- Accessing a loan through your equity often offers more affordable interest rates as it provides added security for lenders, making it an economical choice for significant projects.
- You can use the money for various purposes, whether it’s home improvements, education expenses, vacations, or consolidating high-interest debts, providing financial flexibility to meet your needs.
Disadvantages of Using Your Home Equity:
- Home equity loans may involve fees for appraisals, applications, and legal documents, which can add to the overall borrowing cost.
- Choosing a variable interest rate might seem appealing initially but can lead to fluctuating interest costs over time.
- Defaulting on home equity loan payments can result in foreclosure, putting your home at risk. Ensure you have a stable financial plan before considering a second mortgage.
Other Factors Influencing the Maximum Amount of a Home Equity Loan That You Can Obtain
Several factors beyond the 80% maximum limit and your remaining mortgage balance can impact the amount of a home equity loan you can secure.
These factors can lead to additional costs, typically subtracted from the loan value when issued to you. They are crucial for understanding the total loan amount and potential deductions.
Turn Your Home Equity into a Financial Asset – Contact Us Now
Gaining insight into the amount of equity you can access from your Canadian home is crucial to making financial choices. We’re here to help and guidance during your financial journey. Your financial well-being matters, and with the proper knowledge and support, you can make the most of your home equity while safeguarding your financial future. Contact us now.