How to Access Your Home Equity

Unlocking Your Home’s Potential

For Canadian homeowners, the equity built up in their homes is often one of their most valuable financial assets. Whether it’s to fund renovations, consolidate debt, make new investments, or even enjoy a dream vacation, accessing this equity can open doors to new opportunities. With housing markets evolving and interest rates fluctuating, understanding your options for tapping into home equity is more important than ever. Let’s explore the main ways Canadian mortgage borrowers can access their home equity, breaking down each option with its benefits and considerations.

What Is Home Equity?

Home equity is the difference between your home’s current market value and the outstanding balance on your mortgage. For example, if your home is worth $600,000 and you owe $200,000 on your mortgage, you have $400,000 in home equity. This equity can act as a financial resource, but accessing it requires choosing the right tool for your needs.

Option 1: Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is one of the most popular ways to access home equity in Canada. It’s a revolving line of credit secured by your home, allowing you to borrow up to a certain limit—typically 65% of your home’s value under current regulations (recently revised regulations from the Office of the Superintendent of Financial Institutions cap the re-advanceable portion of a HELOC at 65%).

• How It Works: You’re approved for a credit limit, and you can borrow, repay, and borrow again as needed, much like a credit card. You make monthly payments of interest, but the principal balance does not regularly amortize. Sometimes a HELOC can be paired with a mortgage (a “readvanceable mortgage”), where the HELOC limit increases as you pay down your mortgage principal.

• Benefits: The key benefits are flexibility and cost. HELOCs can be drawn on at any time and only pay interest on the balance that you have borrowed. They are great for ongoing or unplanned expenses like renovations, education costs or medical bills.

Interest rates are usually lower than unsecured loans because the HELOC is secured by your property. The rates are tied to the prime rate (e.g., prime + 1%). You can pay down the HELOC at any time without penalty.

• Considerations: Because HELOCs have variable interest rates the cost of borrowing will increase as rates increase. When the prime rate increases, the monthly payments will also increase. You will need equity for the down payment of up to 35% and a solid credit score (typically 680+). Borrowers should also be cautious about overborrowing. The available limit on an unused HELOC can tempt you into more debt if you’re not disciplined.

Option 2: Second Mortgage

A second mortgage is a mortgage that sits in second place on your mortgage title, behind an existing first mortgage.

• How It Works: A second mortgage provides you a lump sum on closing. You repay the second mortgage the same way as with your first mortgage, by making monthly blended payments of principal and interest. Depending on the lender you may be able to borrow up to 80% of your home’s value (your first and second mortgage balances cannot exceed 80%).

• Benefits: Predictable payments with a fixed rate make budgeting easier, and it’s ideal for one-time expenses like debt consolidation or a home renovation. Interest rates are usually lower than unsecured debt like credit cards but higher than your first mortgage.

• Considerations: You’ll need to manage payments on both your first and second mortgages. The first and second mortgage do not have to be with the same lender. The minimum size most lenders will consider for a second mortgage is at least $50,000. Upfront costs like lender, appraisal and legal fees will also apply.

Option 3: Mortgage Refinancing

Refinancing involves replacing your existing mortgage with a new, larger one to cash out some of your equity. You can refinance with your existing lender or with a new lender and it can be done during the term of your existing mortgage or at renewal.

• How It Works: With a refinance you can borrow more than your current mortgage balance, up to 80% of your home’s value. The proceeds pay off your existing mortgage and the incremental amount is yours to use. For example, if your home is worth $500,000 and you owe $200,000, you could refinance for $400,000, paying off the $200,000 and taking $200,000 in cash.

• Benefits: You can pay down more expensive debts like credit cards and unsecured loans by using the less expensive refinanced mortgage proceeds. Reducing your monthly debt payments can free up your hard-earned monthly income for other purposes. You can also access equity to make new investments or pay for large projects.

• Considerations: Refinancing allows you to reset your mortgage balance to a higher amount, change the amortization to set the payment to an amount you prefer and change other terms. Increasing the balance obviously increases your total debt load if it is not used to pay down other debts. Extending your amortization will reduce your monthly payment but add to the cost of the mortgage over time. If you refinance during the term of your existing mortgage you will have to pay a prepayment penalty for breaking the mortgages. You’ll face closing costs for the new mortgage.

Option 4: Reverse Mortgage

A reverse mortgage is an increasingly popular option for Canadians aged 55+, allowing you to borrow against your equity without monthly repayments.

• How It Works: You can access up to 55% of your home’s value, received as a lump sum or installments. There are no monthly payments on the loan. The interest accrues against the equity in the property. The loan, plus interest, is repaid when you sell your home, move out, or pass away. There are a few providers of reverse mortgage in Canada.

• Benefits: It is a great product for retirees that need some cash but do not want to move out of their home. Income and credit scores matter less than with traditional mortgages - equity is the focus.

• Considerations: Interest rates are higher than typical first mortgages but competitive with HELOCs. Interest accumulates over time, reducing your equity in the home. You have to maintain the property as before, pay property taxes, etc.

Which Option Is Right for You?

Choosing how to access your home equity depends on your goals, financial situation, and timeline:

• Need flexibility? Go for a HELOC.
• Want a one-time lump sum and a predictable monthly payment? A second mortgage may be the best fit.
• Looking to simplify into one payment? Refinancing might be best.
• Want the lowest rate? Refinancing with one first mortgage will carry the lowest rate.
• Retired and seeking income? A reverse mortgage could be your answer.

Final Thoughts

Accessing home equity is a powerful way for Canadian mortgage borrowers to leverage their biggest asset to their benefit. Rather than looking for other credit to pay for things you need, it is best to first look at how you can finance your property to meet your needs. A secured mortgage financing carries lower interest rates than other unsecured borrowing alternatives.

It is not without risks, however. You are securing the debt with your home and borrowing more than you can handle could lead to financial strain. It is wise to consult an experienced mortgage broker or financial advisor to evaluate your options. Calculate your equity, assess your needs, understand the risks and select the financing the best sets up your financial future. Your home’s value isn’t just a number - it’s a tool to build the life you want.

At Frank Mortgage we are customer-first and ready to help you evaluate the mortgage financing options that are best for you. Please call us at 1-888-850-1337 or find us at www.frankmortgage.com.