Home equity is the difference between what you owe on your mortgage and your home’s current value. 

For example, if your home is worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 of equity. Home equity accrues as you pay more on your mortgage and as the market value increases. In the Niagara Region, home values have spiked during the COVID-19 pandemic. The overall MLS® HPI benchmark price for the Niagara Region was $652,200 in July 2021, an increase of 36% compared to July 2020.  Needless to say, Niagara homeowners enjoyed a major surge in home equity and overall personal net worth. What if you are happily settled in your home with no plans to sell? You may wonder how you can leverage the power of your home equity. 

Source: https://creastats.crea.ca/board/stca

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A Word of Warning

We will delve into 4 ways in which you can take advantage of the equity in your home, but it is important to carefully consider your decision as you want to avoid turning your home into a piggy bank!

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How Can You Make the Most of Your Home’s Equity?

1. Renovations

Home improvements are one of the most common reasons that homeowners turn the capital accrued in their home into cash. Homeowners renovate for several reasons, some of which include making the home more appealing or comfortable or to complete necessary upgrades or repairs to maintain the home’s value and function. It is most common to use a HELOC (Home Equity Line of Credit) to tap into the money available in your home. The great news is that it is likely that most of these improvements will raise the home’s value and its appeal to prospective buyers should you decide to sell further down the road. Upgrades to kitchens & baths often yield a solid return on investment.

2. Long Term Investments

Whether you are planning on selling your home and using the equity you have built to buy an investment property or you plan to stay in your current home and use the equity you have built as a down payment on another property, you can use the capital you have accrued to help you build your real estate portfolio. Options include investment properties or vacation homes that can be used to generate rental income.  In either case, proceed with caution and ensure that you consult with a mortgage broker or specialist who can help you break down the numbers to make sure that this makes sense for you.

3. Debt Consolidation

Most homeowners use their home equity to consolidate their high interest debt into lower interest rates. Although this is a popular choice, it is important to have a solid, debt pay-off plan or it may become tempting to start using your home as a piggy bank (refer to Word of Warning issued above). As long as a homeowner is committed to paying off their debt in the long term, they will not whittle away their home’s worth.  For these homeowners, it makes sense to consolidate debt at a substantially lower interest rate and save money each month. 

4. Retirement

For most retirees, home equity is a big chunk of their net worth and an important part of their retirement plan, especially for those who are not planning on staying in their family home. For retirees who are planning on downsizing to a less expensive home, the equity that they have accumulated over the years often provides a financial cushion that allows them to purchase a smaller home and live more comfortably after they have finished working. If you plan on aging-in-place and the need arises, HELOCs or Home Equity Loans may be good options.  

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Bottom Line:

Tapping into your home’s equity can be a good way to access funds to achieve your financial and personal goals; however, it should be done responsibly and with a carefully thought-out plan in mind.  Borrow only what you need and make the most of it.