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In today’s red hot housing market in Canada, many Canadian homeowners ask how much equity they have in their home? They could want to pay down other debts, such as an auto loan or student loan, or they might be looking at funding some home renovations. Knowing how much equity you have in your home is great, even if you are not thinking about refinancing or borrowing against your home.
Home equity is a straightforward calculation. It is the difference between the current market value of your home and the total sum of debts registered against it. For most people, the debts registered against their home are solely their primary mortgage, but this might differ depending on your situation.
So, let’s do some math to showcase what we mean.
You bought a home for 500,000 and have 400,000 left on your mortgage. However, in the time since you purchased your home, home prices have gone up to 600,000. Well, then home equity is the value of your home, in this case, $600,000 minus the debt against your home, in this case, a primary mortgage of 400,000. So, your total home equity is $200,000
In Canada, homeowners are allowed to borrow up to 80 per cent of their home’s appraised value, minus the balance of the first home. However, lenders may not always provide the entire 80 per cent; it will depend on your specific financial situation.
Naturally, you should be aware of a few things with a home equity loan before looking at this kind of option.
Home equity loans are not free to take out, and like any major loan, some fees are associated. The exact fees and costs will depend on the lender, but you should expect to pay some administrative fees, including:
Generally, a home equity or second mortgage loan has a higher interest than a principle loan. The reason for this is quite simple: the lender providing the second mortgage is taking a greater risk that they will not get paid out if you go into default.
If you cannot pay your mortgage, your home can be sold off to pay for both your first and second mortgage. However, the principal mortgage gets paid out first, and thus the second mortgage lender will want to ensure it is covered if the sale of the home does not cover their portion of the mortgage.
You may also see LTV or loan to value ratio when looking at home equity. Lenders often use this ratio to determine your home’s equity in a percentage valuation. So, you would divide the remaining loan balance ($400,000) by the current market value ($600,000) for our original equity. So this would be a 66.7% LTV.
The lower the LTV, the less risk there is for the lender that you will default on a loan.
No, your home equity will fluctuate over time. In most cases, it will increase, but you may have less home equity during downturns in the market. It all depends on comparable and what the market is doing in your area.
In Canada, three loan types use your home equity. A HELOC (home equity line of credit) is a revolving loan that allows you to borrow when you need it to a set amount. A home equity loan is a fixed loan that has a term and a fixed or variable interest rate. A private mortgage is also a fixed loan with a term and a higher fixed or variable interest rate. However, a private mortgage is generally for a shorter period than a home equity loan.
All of the big five banks, including TD, BMO, CIBC, RBC and Scotia, offer HELOC and Home Equity Loans. Several smaller lenders that often match or beat the big bank’s interest rates also exist, including Motusbank, Canadalend, First Ontario, Meridian, DUCA and Home Trust. Finally, private mortgage lenders also provide an option, including companies like Alpine Credits, VWR Capital, and Clover Mortgage.
This is a question for you and your financial advisor. It will depend on where you are in your financial plan and if the extra money would assist you in adding value to your home or paying down debt. Generally, second mortgages are great as they provide an influx of cash that allows you to consolidate debt or pay for renovations to your home. In contrast, a traditional loan or line of credit may be better for other situations. We strongly suggest you chat with a mortgage broker or financial advisor to find the best solution for you.
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