The Best Strategies for Leveraging Your Home Equity in Light of Toronto’s Rising Real Estate Costs
Thanks to its culture, walkability, safety, and other factors, Toronto frequently tops lists of the world’s best places to live. The average home price in the city of Toronto has increased to an unmanageable level as a result of many variables, including a robust economy, significant migration, a low rental vacancy rate, and investments in real estate as an asset.
Despite the fact that provincial and federal laws intended to calm the market had a significant effect on sales and price rises between late 2017 and mid-2018, an analysis by Zoocasa reveals that, over the last five-year period, property value has significantly increased. And no part of Toronto GTA is left out of this frenzy
It is no secret that the housing and real estate markets in Toronto have exploded over the past ten years and are still doing so.
The question is, how do you make the best use of this additional home value that you have accrued over the years? For individuals who aren’t actively looking to sell a home, the rising property prices in Toronto’s housing market may initially appear to be bad news; however, in reality, they represent a significant chance for homeowners to obtain additional funds without selling by leveraging the equity in their homes.
What Exactly Is Home Equity?
The difference between the value of your house and your mortgage balance is what is known as your “home equity.” As more mortgage payments are made over time and market forces affect the property’s current value, the amount of equity in a home changes.
Home equity can refer to more than just a mortgage loan that has been repaid. Homeowners can borrow money against this asset to cover crucial expenses like paying off high-interest debt or covering college costs. Homeowners in Canada are permitted to borrow up to 80% of the value of their home. Because the funds are secured by the equity in the property, the interest rate for borrowing based on home equity is often lower than that on credit cards and personal loans. So your home’s equity could be a wise source of money. Additionally, interest paid on such borrowing is typically tax deductible if the money is put toward home improvements.
Using a home equity loan or a home equity line of credit, consumers can benefit from what they already own. For instance, if you own a $700,000 condo and owe $400,000 on it, you have $300,000 in equity, which will increase as you make additional mortgage payments. When the housing market is strong, equity increases as well, which raises prices, as has been the case recently.
How to Borrow Against Home Equity
Home equity cannot be immediately turned into cash, unlike some investments. This is so because your property’s current market value is used to determine your equity. The property may not actually sell for that amount, notwithstanding the appraisal.
A homeowner can, however, use the equity in their property as collateral in a number of ways to obtain low-cost funds for their financial requirements. Below are the types of borrowing options available to you:
1. Home Equity Loans:
You can typically borrow a lump sum against your present home equity at a set rate over a fixed period with a home equity loan, sometimes known as a second mortgage. Large expenses like house repairs or college tuition are frequently financed with the help of home equity loans.
2. Home Equity Line of Credit:
You can borrow up to a specific amount over a specific amount of time using a home equity line of credit (HELOC), which is a revolving line of credit that often has an adjustable interest rate. Helocs, like credit cards, allow you to borrow money indefinitely up to a pre-approved limit while repaying the outstanding balance.
3. Cash-Out Refinance:
Using your equity to obtain a new mortgage that is more expensive than the balance on your current mortgage is known as a “cash-out refinance.” After that, you spend the remaining funds as needed and pay off the current mortgage. The money is tax-free because the IRS views it as debt, not income, similar to how it views home equity loans and lines of credit.
Once you’ve accessed your home equity, you can ultimately spend the funds however you like. Even though home equity can be used for a variety of financial objectives, it isn’t always prudent to use it in any way. Keep in mind that your house is your security; if you can’t repay the money you borrowed against the equity, you risk losing your home. Purchases like buying cars, spending on luxurious items, booking holidays, or investing the money in stock markets are some examples of the worst utilization of your home equity and just don’t make sense.
Some of the Best Ways to Leverage Home Equity Are Listed Below.
High Value renovations:
The most frequent use of home equity is to finance home renovations and repairs. The modifications you make to the property will boost the value of your home and develop more equity as a result. Solar panel installation, adding a pool to your backyard, or constructing legal basement suites or laneway houses are examples of home renovation tasks that, over time, may prove to be more valuable than the initial investment.
Buying Another Property:
For real estate investing, you might also use equity. Let’s imagine you want to purchase a rental property and are interested in obtaining a loan for an investment property. A minimum 15%–20% down payment is one of the important requirements, depending on your credit score.
For instance, to acquire a $200,000 investment property, you would need to put down $30,000 to $40,000, which may come from a home equity loan or HELOC against your own residence. Ideally, that property would provide enough rental income to pay your mortgage, as well as maintenance, repairs, and payments on the home equity loan
High-Interest Debt Consolidation:
Utilizing home equity to pay down high-interest debt can be a powerful tool for controlling personal debt (credit card debt and a car loan, for example). You get the benefit of a single, set monthly payment with debt consolidation loans, which is frequently at a lower interest rate than revolving credit card debt. Leveraging home equity to pay off debt has the drawback of not producing the smarter spending habits that are frequently required to terminate debt cycles. Make sure to consider ways to maximize your spending in order to prevent further debt growth.
Home equity can help you achieve your financial goals, but it only works in your favor if you use it wisely. Avoid tapping your equity to invest in depreciating assets. Think twice about using your home equity to buy a brand-new car or new furniture. These items depreciate in value over time, and you can lose your home if you can’t keep up with the home equity loan, or HELOC, payments.