Home equity can be a powerful tool when you know how to use it. This guide explores how equity impacts your wealth and the different ways you can access it.
How Home Equity Works
Home equity is simply the difference between your home’s current market value and the amount you still owe on your mortgage. From the moment you make your down payment, you own that portion of the property outright.
For example, if your home costs $1 million and you put down 20%, you immediately have $200,000 in equity.
What Determines Home Equity?
Home equity is based on your home’s current value—not the original purchase price. As you pay down your mortgage and your home’s value increases, your equity grows.
Two key factors determine home equity:
Mortgage balance – The amount you still owe.
Property appreciation or depreciation – How your home’s market value changes over time.
Property value is influenced by:
Market trends in your neighbourhood
Upgrades or renovations that add value
Issues such as structural damage that reduce value
How to Calculate Home Value and Equity
Mortgage payments consist of both principal and interest, but only the principal portion builds equity.
Example:
Initial mortgage balance: $800,000
Mortgage rate: 4%
Monthly payment: $4,208
Total payments after 2 years: $100,995.88
Interest paid: $62,011.35
Principal paid: $38,984.50
New mortgage balance: $761,015.54
Current home value: $1.2 million
Total equity: $1,200,000 – $761,015.54 = $438,984.46
Typically, you can borrow up to 80% of your equity. In this example, that would be approximately $351,187.57.
How to Use Home Equity
1. Buying a New Home
If you are selling your current home to buy another, your equity can be used for the down payment. Ideally, the sale and purchase happen simultaneously, allowing you to use your equity right away. If you purchase before selling, a bridge loan can cover the down payment until your home sells.
2. Investing in Real Estate
A Home Equity Line of Credit (HELOC) can fund a down payment or purchase of a rental property. Rental income can then help cover the new mortgage.
3. Building Wealth
Using a HELOC to fund investments is often considered “good debt” because it can increase your net worth. This approach focuses on generating returns rather than spending on non-appreciating items.
4. Retirement Planning
Options include:
Using a HELOC for investments or expenses
Downsizing to purchase a more affordable home with cash or a reduced mortgage
Accessing equity through a Canadian Home Income Plan (CHIP) to supplement retirement income
5. Home Improvements
Two primary options are:
HELOC: Flexible borrowing during renovations, with repayment starting afterward. Interest applies only to what you use, but rates may be variable.
Home Equity Loan: Provides a lump sum with a fixed rate. Payments start immediately, and interest applies to the full amount borrowed.
Final Thoughts
Home equity can be a valuable resource for achieving financial goals—whether you want to invest, renovate, retire, or move. If you are considering accessing your equity, start by assessing your current home value and speaking with a mortgage broker to determine your options.