Home equity is a valuable asset for Canadian homeowners. This equity can give homeowners the financial flexibility to borrow against their homes if needed. However, equity should also be managed carefully, as it represents your ownership stake.
This article will explore what home equity is, how it works, how to build it, and how Canadians can strategically take out home equity to achieve their financial goals.
What is Home Equity and How Does it Work?
Home equity is the difference between your property’s current fair market value and the amount you still owe on your mortgage headliner.
Equity essentially represents the portion of your home that you fully own. As you make mortgage payments, your loan balance decreases while your equity increases. The increase in your home value also builds equity for you.
When you purchase a home by taking out a mortgage from a Canadian lender, the lender registers a lien against your property to secure the loan. This means the lender has a financial claim on your house until you repay the mortgage in full.
As you gradually pay down the mortgage principal and as your home appreciates in market value, your share of ownership slowly increases while the lender’s share decreases. The portion you own, free and clear, is your equity.
How to Calculate Your Home Equity?
You can determine your current home equity by using this simple formula:
Home Equity = Current Home Value – Remaining Mortgage Balance
To find your home’s current value, consult real estate sites and review prices for recent comparable sales in your neighbourhood. For a very accurate estimate, hire an appraiser.
Your mortgage lender can provide your remaining mortgage balance. Be sure to only use the principal portion you still owe, not counting interest costs.
Plug the numbers into the formula:
- Home’s Current Value: $500,000
- Remaining mortgage owed: $200,000
- Home Equity = $500,000 – $200,000 = $300,000
Check your home equity yearly or whenever you consider tapping into it through refinancing or borrowing. Home value estimates only provide a ballpark figure, so get an official appraisal before taking out an equity loan.
How can you build your Home equity?
There are two factors that can increase or decrease your home’s equity over time: your mortgage balance and your home value.
Building Equity Through Mortgage Payments
With every mortgage payment you make, a portion goes toward interest costs, and a portion reduces your mortgage principal (the amount you initially borrowed), which builds your home equity.
Makin Consistent Mortgage Payments
By making consistent payments over time, your outstanding mortgage balance will decrease while your equity stake in the home will grow. Sticking to your payment schedule steadily pays down your mortgage principal.
For example, let’s say you take out a $300,000 mortgage. After 5 years of regular payments, you may have paid the balance down to $250,000. That $50,000 in principal you’ve paid off represents your accumulated equity.
Making Lump Sum or Accelerated Payments
The amortization schedule for your mortgage outlines how much equity you’ll build with each payment. Lump sum payments and accelerated biweekly or weekly payment plans allow you to pay down your principal faster and build equity more quickly.
- Lump sum payments – Making periodic extra payments directly to your mortgage principal
- Accelerated biweekly payments – Splitting your monthly payment in half and paying every 2 weeks to achieve an extra month’s payment per year
- Accelerated weekly payments – Splitting payments even further to achieve 52 payments per year instead of 12.
Making an extra $100 monthly payment on a $250,000 mortgage can allow you to pay it off 3 years sooner and save over $13,000 in interest. Accelerating payments grows equity faster through faster principal reduction.
Read more: Mortgage Payment Options in Canada
Building Equity Through Home Appreciation
As real estate values rise, your equity is built even if your mortgage balance stays unchanged.
Waiting for Your Home’s Value to Appreciate
Even if you do nothing, your home equity can grow through natural appreciation over time. However, real estate markets fluctuate so that values could rise or fall.
The Canada Mortgage and Housing Corporation (CMHC) predicts that the average cost of housing price will increase from $694,196 in 2024 to $746,410 in 2025. Such dramatic appreciation grows equity significantly even without paying down your mortgage quicker.
However, it’s risky to count on appreciation alone. A safer strategy is to make payments diligently while waiting for your home to (hopefully) increase in value.
Home Renovations or Improvements
The real estate market drives appreciation, but home improvements and renovations, such as kitchen upgrades, finished basements, new roofs, or bathroom remodels, can potentially boost your home’s worth. Home renovations can potentially increase your home’s value.
However, not all renovations boost resale value, so choose carefully if equity growth is the goal. Research which home improvement projects are most worthwhile in your local market.
How to Access Your Home Equity in Canada?
If you decide tapping into your equity aligns with your financial plans, here are 4 common ways to access it:
| Loan type | How they work |
| Second Mortgage | An additional loan behind your existing first mortgage. Help access up to 80% of your home value minus your first mortgage balance. |
| Home Equity Loan | These loans let you borrow against up to 80% of your home equity value . |
| Home Equity Lines of Credit (HELOC) | A revolving credit secured by your home. The lender approves you for a credit limit of up to 65-80% of your equity. |
| Reverse Mortgage | These loans let you borrow against up to 80% of your home equity value. |
Ways to use Home Equity in Canada
Growing home equity expands your financial flexibility as a homeowner. You can unlock your equity through home equity loans or lines of credit. 3 common ways Canadians leverage their equity include:
Financing Home Renovations
Home equity loans or lines of credit allow you to tap home equity to finance renovations or upgrades rather than relying on savings or high-interest debt.
Home equity loans get your funds in a lump sum, while lines of credit offer flexible access to approved borrowing limits over time. Interest rates are often lower than other borrowing options.
A home equity loan could offer funds for a major renovation, while a line of credit allows you to draw incrementally for more minor upgrades.
Buying Investment Properties
Your equity can help you buy rental properties or vacation homes without requiring as large of a mortgage. This allows you to expand your real estate portfolio.
Borrowing against your home to invest does carry risks, as your residence secures the equity debt. However, it provides affordable access to capital for investments when used strategically.
Funding Other Major Purchases
Besides real estate, equity loans can fund large expenses like:
- Post-secondary tuition
- Medical bills
- Weddings
- Debt consolidation
- New vehicles
- Starting a business
Consolidating high-interest debt with lower equity loans improves cash flow. Equity borrowing can also avoid liquidating your other assets to fund major costs.
What are the Pros and Cons of Using Home Equity?
Leveraging equity through loans or lines of credit provides affordable financing but also poses risks:
| Pros | Cons |
| – Lower interest rates than unsecured loans – Simple application process with minimal requirements – Flexible access to approved borrowing limit – Often tax-deductible interest | – Risks your home as collateral – Can encourage overspending – Repayment is required upon the sale of a home – Equity borrowing limits available for future needs |
Use equity strategically based on your financial situation. Consult professionals like financial advisors and accountants to make informed decisions.
Tips for Managing Home Equity in Canada
Here are 5 tips to help Canadian homeowners prudently manage their equity:
Monitor Your Home’s Value
Track your home’s estimated fair market value using online tools and data on recent comparable sales in your neighbourhood. This will help you determine the potential equity available to borrow against if needed.
Getting a professional appraisal before an equity loan ensures you know your equity.
Be Cautious When Tapping Equity
Resist the temptation to view your equity as free money. Borrowing too much equity can leave you cash-poor. Don’t tap more than you need. Have a repayment plan for equity loans.
Consult Financial Experts
Talk to financial planners, mortgage brokers, accountants, and lawyers to ensure you make informed equity-related decisions tailored to your situation.
Understand Tax Implications
In Canada, interest on equity loans for home improvements is tax deductible, while interest for other uses is not. Therefore, it is important to understand tax policies when planning equity borrowing.
Maintain Home Insurance
If a loss occurs, keep sufficient home insurance to protect your growing equity investment. Review coverage limits as your home value rises.
Home equity unlocks borrowing potential, allowing you to access capital for renovations, investments, debt consolidation, and more. However, borrowed equity also adds risk, so pursue strategies that align with your risk tolerance and long-term goals.
Monitoring your equity, making payments diligently, and consulting the mortgage brokers at Best Mortgage Online will help you reap the rewards of homeownership while using equity prudently.
FAQs
How often should I calculate my home equity in Canada?
It's best to calculate your Canadian home equity at least annually and when considering borrowing against your equity. Home values change regularly, so check often.
What are the best ways to build home equity in Canada?
The primary ways to build equity are making extra mortgage payments, completing renovations that raise value, and allowing your home to appreciate naturally over time.
Can I use equity for anything besides home renovations in Canada?
Yes, you can use borrowed home equity for other major expenses, such as debt repayment, educational costs, medical bills, investments, and more.
What happens to home equity after divorce in Canada?
Equity is considered a family asset. Upon divorce settlement in Canada, equity is often divided between spouses based on factors like custody and contributions.
How does refinancing affect home equity in Canada?
Refinancing itself doesn't directly change equity, but taking cash out during a refinance converts equity into cash, thereby lowering your remaining equity.
Should I make extra mortgage payments or invest instead to build home equity?
This depends on your financial goals. Making extra payments directly builds equity quicker, whereas investing provides potentially higher returns but less equity growth.
Is home equity taxable when borrowing against it in Canada?
No, borrowed home equity itself is not taxable income in Canada. However, interest may become non-deductible if not used for home improvements.
How do reverse mortgages affect Canadian home equity?
Reverse mortgages allow you to convert a portion of your equity into tax-free cash but also deplete the equity available for heirs. Consult experts.
Can lenders reject my equity loan or line of credit application in Canada?
Yes, lenders in Canada may reject equity borrowing applications if you have significant debts, poor credit, or insufficient income to repay the debt.