The Canadian real estate market has seen significant price increases in recent years, this growth has boosted home equity for many homeowners. With rising home values comes a noticeable uptick in home equity loans. Many homeowners are tapping into their home equity to finance everything from renovations to consolidating high-interest debts.

Home equity is essentially the financial stake you have in your house. It’s the monetary difference between your home’s current market value and the remaining balance on your mortgage. When property values in your area rise, the value of your home increases, and so does your home equity!

With longer life expectancies and concerns about the adequacy of retirement savings, some Canadians view their home equity as a sort of retirement nest egg.  Older homeowners opt to downsize by selling their family homes to move into smaller properties or condominiums. This allows them to release the equity built up in their homes for retirement or other needs.

Home equity can be a powerful financial tool. Here are a few ways you can take advantage of it.

Access Fresh Funds by Refinancing Your Home

When market conditions improve and lower interest rates become available, you can renegotiate the terms of your existing mortgage and replace it with a new one. If you’ve owned your home for several years and have dutifully made mortgage payments, you’ve likely built-up considerable equity. Refinancing allows you to tap into this to finance major expenses.

Refinancing can also allow you to take advantage of lower interest rates, thus reducing your monthly mortgage payments. This can translate into significant savings over the life of your loan. Keep in mind that extending your repayment period might lead to higher overall interest costs.

Before you decide to refinance, it’s crucial to weigh the costs against the benefits. Just like your original mortgage, refinancing comes with closing costs. These can include application fees, legal fees, appraisal fees, and more.

Note that because you are effectively breaking the initial mortgage contract by refinancing, most lenders impose a penalty to compensate for the financial loss they incur. Generally, the closer you are to the end of your mortgage term, the less severe the penalty will be. This is because the lender stands to lose less interest over a shorter period. In some cases, you can negotiate the prepayment penalty with your lender, especially if you plan to stick with the same lender for your refinanced mortgage.

Take Advantage of a Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) operates like a credit card but uses your home as collateral. It’s a type of loan that provides you with a revolving line of credit based on the equity you’ve built up in your home. You can borrow any amount at any time. This can be especially useful for ongoing expenses like home renovations or investments.

Be mindful of the fact that, unlike traditional home loans, HELOCs usually come with variable interest rates, meaning the rates can rise or fall over time. If interest rates increase, so do your monthly payments, which can lead to higher repayment costs. Keep a close eye on interest rate trends. If rates start climbing, consider paying down your HELOC faster to minimize the impact of future rate hikes.

Leverage Your Home Equity for Other Investments

Funds from a home equity loan, HELOC, or cash-out refinance gives you the opportunity to invest in other properties, the stock market, start a business, or fund other income-generating ventures. If the investment does well, it could yield a return rate surpassing your equity loan’s interest rate. This difference, less any loan costs, is your net profit. The interest on the money borrowed against your home equity to buy an income-generating property or invest in a business may be tax-deductible. But you must meet specific requirements set by the Canada Revenue Agency.

If you cannot repay the loan, you could face the harsh reality of losing your home. It’s a sobering thought that underscores the need to make informed, prudent financial decisions.

Increase Your Home’s Value Through Home Improvements

Undertaking home improvements can increase the value of your property. Renovations such as upgrading the kitchen, adding a bathroom, or finishing a basement are known to yield a high return on investment. When you decide to sell your home, you can recoup your investment or even make a profit. Improvements can make your home more comfortable, practical, and enjoyable. For example, expanding your living space could accommodate a growing family, while upgrading insulation can enhance energy efficiency and reduce utility costs. In Canada, certain types of home improvements can provide tax benefits, such as the Home Accessibility Tax Credit (HATC). This allows deductions for eligible home renovation expenses for seniors and persons with disabilities.

Not all home improvements add significant value to a home, and it’s possible to spend more on renovations than you can recoup in a sale. This is known as overcapitalization. Doing your research and consulting with one of our team member before embarking on any significant projects is essential.

Are you considering selling your home? The Barnett Real Estate Team understands what makes a property sell at the highest price possible. From strategic home staging to effective marketing, we ensure your home stands out in the market, attracting competitive offers.

Contact us for a consultation.

Two years ago, the Canadian government reduced interest rates to the lowest they’ve been in decades. No one could have predicted the drastic impact these ultra-low rates would have on the housing market. The country braced itself for a real estate crash, but the opposite happened. The low cost of borrowing triggered a record-breaking surge as buyers snapped up available properties, sometimes even before they were listed. 

This buying frenzy has caused housing prices to soar since there are simply not enough listings for buyers to choose from. The supply of houses for sale has dwindled so much that hopeful buyers often leave letters throughout the neighbourhood pleading with the current owners to sell.

How Interest Rates Can Affect Housing Prices

Now, the inevitable has happened. Two weeks ago, the Bank of Canada announced the first of several hikes to the target rate, and the prime rate quickly followed. While this first interest rate increase was slight, it has made it more expensive to borrow and more difficult for a potential buyer to qualify for a mortgage. In addition, this is just the first of a series of hikes we can expect over the next twelve months. What will all of this mean for current homeowners and those looking to get into the market?

First, let’s talk about the types of interest rates a buyer has to choose from:

Fixed-Rate: A fixed term is locked in until the mortgage is due for refinancing. Though it’s typically higher than a variable rate, the buyer has peace of mind knowing that their monthly payment can’t increase before the term expires. 

Variable-rate: Although variable-rates are usually lower than fixed-rates, the term is not locked in. Payments will fluctuate as the Bank of Canada changes the rate. It’s a riskier option, but many buyers have gone this route to lower their cost of borrowing. 

Now that the Bank of Canada has started raising interest, they are about to see an increase in their monthly carrying costs. How much? Each hike represents an additional $12 to $13 per $100,000 remaining on their mortgage. A series of three increases mean an additional $36 to $39 per $100,000. 

Want to know more about what’s happening in the current market? Here are some updates to check out:

• How Will Rising Interest Rates Affect Buyers
• Everything You Need To Know About Buying A House In Milton
• Your Guide To Basement Apartments And Secondary Suites

Small hikes can get expensive very quickly

The news isn’t all bad. A few years ago, the government introduced the new stress test laws to ensure a potential homeowner had enough income to withstand increasing rates.

Curious about changes to the stress test? You can read our article about it here.

The question is, will owning their home still be worth it? Rising costs and inflation mean that many homeowners have a decision to make: Stay or sell? Of course, many residents will want to stay in their homes and are willing to weather the extra expense. Others may decide to sell and downsize into a smaller house or move to a less expensive area. 

Where Do Investors Stand?

Low-interest rates combined with soaring property prices have made real estate one of the safest and most profitable investment tools available. Low borrowing costs meant it was relatively easy to cover the mortgage through the rental income. Plus, your wealth and equity grow as the value of the property appreciates. In the last few years, more investors have jumped into the market than ever before. In fact, a study by the Bank of Canada estimates that one in five home purchases are by investors, not residents. 

As interest rates continue to increase, it will become harder to enter the market as an investor. And if the housing prices begin to cool, real estate may not be quite as profitable as it once was.

What Will Happen to Housing Prices?

No one can predict the future, but most analysts don’t expect a significant drop in prices, at least not yet. The market is still competitive and will likely continue to favour sellers for the foreseeable future. However, a series of interest hikes could signal the end of the record-breaking growth in prices. The increased cost of borrowing will force some hopeful buyers out of the market. Fewer qualified buyers mean less competition, and fierce bidding wars will happen far less often. 

Is the Time Right to Sell?

As an investor, only you can decide if the time is right to sell. Do you enjoy the rewards and responsibilities of being a landlord, and can you weather a few bumps in the road as the market balances? If you’re in it for the long haul, holding on to your property might be the right choice. However, if you want to cash out of your investment, the timing couldn’t be better. Right now, prices are at an all-time high. 

As early as 2019, the average house in Burlington sold for $669,611. Fast forward to February 2022, and the price has shot up to $1,137,000. After only three years, you’d have a gross profit of $467,389. 

If you were fortunate enough to land the property ten years ago, you could earn over $700,000 by selling it now.

In Milton, the average selling price of a house ten years ago was $287,875. As of February 2022, that same house now goes for an average of $1,142,001, which would give you a profit of $854,126. This means you stand to earn a very good return on your investment if you decide to cash out.

These proceeds could give a healthy boost to your retirement plans, fund your children’s education or even go towards your ultimate dream home.

If you decide to sell a property that has tenants, there are a few things you should know about. These resources will help you enjoy a smooth transaction and maximize your return on your investment: 

• Five Tips to Make Your Home Stand Out for the Spring Market
• How to Set the Right Home Price the First Time
• Selling a Tenanted Property: What You Should Know
  

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