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Having equity in your home is advantageous because it can improve your net worth and provide you with access to affordable credit. This is why building equity in Canada is important. If you’re wondering how you can build equity in your home, keep reading. 

What Is Home Equity? 

Home equity is an asset, just like your car or other personal property that’s of significant value. The more money you invest toward the asset, the more ownership you’ll claim over it, and the more valuable it becomes. 

How Do You Calculate Home Equity?

You can get an idea of how much home equity you have by calculating the outstanding balance of your current mortgage, then subtracting it from the fair market value of your home (how much it would be worth on the real estate market).

For example, if your home is worth $400,000 and you have $250,000 remaining on your mortgage. You’d have $150,000 ($400,000 – $250,000) of home equity built up. = $150,000 of available home equity.

To get a more precise calculation of your home equity, you’ll need to have your property appraised.

Ways Of Building Equity In Your Home

Generally speaking, there are many ways of building equity in your home:

Paying Down Your Mortgage

The first, most simple way of building equity is by paying down your primary mortgage. The more mortgage payments you make, the more of your home’s principal balance you’ll pay off and the more equity you’ll build because of it. 

Make A Large Down Payment

Another way of building equity in your home is by making a large down payment. Let’s say you make a 20% down payment, you’ll have built 20% home equity. Similarly, if you put down 30% of your home value as a down payment, you’ll have 30% of equity built in your home. 

The Value of Your Home Increases on Its Own

Your home builds equity when the real estate market value of your home increases on its own. This happens when your property or neighbourhood as a whole becomes a more desirable living location and the homes in the area go up in price as a result. 

Provinces like British Columbia, Alberta, and Ontario are good locations for this reason, where real estate properties are in demand no matter what shape they’re in. However, getting into the real estate market in these areas can be difficult due to the high demand and cost. 

Increase Your Home’s Market Value

Another way of building equity is by physically adding to the fair market value of your home. You can do this by investing more money in the property itself. This can be done with renovations, additions, and other types of general improvements. 

This equity-building method can be particularly effective when you’ve bought a fixer-upper home, one that requires lots of work but has a relatively cheap real estate value. You can then make all sorts of improvements to the property. This can include an in-ground pool, an extra room, or renovations to the bathroom or kitchen. Each improvement you make could increase your home’s value and your available equity in the process.

How To Fund The Renovations Of Your Home?

There are many ways to fund your home renovations in Canada. You can choose to get a personal loan or a home equity loan if you have some equity in your home. Home equity-backed loans can be a great option as they’re easy to qualify for and tend to have lower rates than a personal loan. 

Home Equity Loans

A home equity loan allows you to borrow up to 80% of your home’s appraised market value minus your current mortgage balance. Home equity loans are a great option if you’re looking for predictable payments and a low-interest rate. 

They work similarly to a regular personal loan where you’ll receive your funds in one lump sum. You’ll then be required to make equal payments over a period of time (up to 25 years). Your payments are usually accompanied by a fixed interest rate, meaning your rate will not change during your payment term. However, variable rates, which fluctuate with the Bank of Canada’s prime lending rate, are also available with some lenders.

Home Equity Lines of Credit

With a HELOC you should be able to access up to 65%-80% of your home’s appraised value. Up to 65% is available for a standalone HELOC, while up to 80% is available if you combine your HELOC with the balance remaining on your primary mortgage.

The process involves applying for a revolving credit limit, similar to what you would have with a credit card. You can borrow from this limit in whatever amounts you wish, then repay those amounts from month to month. You’ll also make minimum payments if you can’t afford your full monthly balance. It’s not recommended to only make minimum payments, as you’ll be charged interest on the amounts that go unpaid. However, doing so will spare you from any penalty charges for defaulting. Your interest rate is usually going to be variable in this case, but fixed rates are sometimes possible. Again, payment term lengths may vary. That being said, some HELOCs can be active for upwards of 20 years.

Alpine Credits

Where Can You Access Your Home Equity? 

You can access your home’s equity through various lenders including Big Banks like TD and BMO. Qualifying with these banks can be difficult though as you may be subject to approval based on various factors such as:

  • Minimum equity requirements
  • Income level requirements
  • Debt-to-income requirements 
  • Stress test requirements 
  • Credit t score requirements

If you don’t have the income or credit score to qualify with a Big Bank, you can still qualify with alternative lenders like Alpine Credits. They have more flexible requirements, and base approval on your available equity rather than your credit score or income. 

Building Equity In Your Home: How Much Do You Need To Qualify? 

Applying for each type of product also involves going through an approval process, where your financial profile will be examined to determine your creditworthiness. Since elements such as your monthly income, employment history, credit report, and credit score will be inspected, it’s very important to have them in good shape before you apply. 

If you’re not sure what your credit score is, be sure to check it. You can do so for free through Loans Canada’s Compare Hub platform. While the qualification standards are a bit more forgiving than other credit products, your lending source still needs to confirm that you can afford all your payments.

Equity Amount Required To Qualify:

  • Home equity loans – at least 20% (30% if your home is worth more than $250,000)
  • HELOCs – at least 20% (sometimes as much as 35% if your home is in an urban area)
  • Refinancing – 5 – 20% (most lenders prefer 20% or over. While you can get a conventional refinancing at 5%, your interest rate may be very high.)

Building Equity In Your Home: Why It Matters

Building equity is important as it can offer numerous benefits, including access to various credit products. You can use your equity to gain access to affordable credit which you can use to further build your home equity. You may also use it for other important expenses such as buying a second property or covering a major expense. 

Building Equity FAQs

What can you use your home equity for in Canada? 

Every homebuyer has different goals when accessing their home equity. However, your equity should only be used for expenses that are relatively essential. That being said, if you’re ready, willing, and able to handle your home equity responsibly, you can use it for plenty of expenses, including but not limited to:
  • Consolidating high-interest debt
  • Making renovations or additions to your property (increasing its value)
  • Financing a new car or additional property
  • Paying for you or your family member’s education
  • Paying property taxes, utilities, and other important bills

What happens if you miss a home equity loan payment?

All home equity loan products are secured against your home and can be used as collateral. Your lender also holds a lien against the property until every mortgage on it is paid in full. As such, if you go into default and start missing payments on either your primary mortgage or new equity product, you’ll not only get slapped with late payment fees but your home may be foreclosed and sold at auction.

Are there fees involved with accessing my home equity?

Like with any sort of credit product, it’s important to ask your lender/broker about any and all costs associated with accessing your home equity. Some common fees you may encounter with accessing your home equity include home appraisal fees, title searches, title insurance and other legal procedures fees.

What are mortgage refinancings?

Refinancing your primary mortgage involves taking out a new mortgage and replacing it with your current one. Although this can be done through your current lending source, homeowners often go through the refinancing process to renew their contracts with a different source in hopes of acquiring a better interest rate. If you choose this route, be warned that you could be charged a penalty for breaking your mortgage contract before your mortgage term is up for renewal. 

Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.

Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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