The best tools for accessing equity right now.
Despite the real estate market showing signs of cooling, Canadian homeowners still hold record high equity. But with the prices poised to take an even deeper dip, gains may start to decrease, so if you have been considering accessing equity, now is certainly the time to do it. Here are the ways we can do it.
In our last post we touched on resetting our budgets for all - trimming excess spending, tightening up monthly bills and taking care of high interest debt first. Since then we have heard from a ton of homeowners across Canada looking to take advantage of their property values now, before the projected dip of 10%+ by accessing the equity they have now. But did you know that there are actually several tools that we can use to access that equity in the way that is right for you and your family? Whether you are looking to access funds to pay down high interest debts (as we discussed last time), invest in a new property while values are down or simply have liquid cash on hand for a recession-fuelled rainy day, any of the below options could be a great one for you.
Home Equity Lines of Credit
A home equity line of credit (HELOC) is probably the most commonly talked about method of accessing the equity in your home. It is essentially an evolving line of credit that exists within your mortgage, allowing you to borrow cash against the appraised value of your home up to the maximum approved amount. HELOCs are getting a ton of airtime lately, as they operate on variable interest rates which means that if you have an outstanding balance on your HELOC currently, your interest payments just went up. That said, rates are still significantly lower than credit card rates of as much as 20%, so they can be a great tool for consolidating debt. Some of the biggest perks of using a HELOC to access equity include:
You don’t have cash on hand when opening it, but will have the ability to borrow it at a later date
No interest accrues until you actually use the funds
They are secured against your home, so come with much lower rates than conventional, unsecured lines of credit.
Refinancing
Refinancing is probably one of the most common things Canadian homeowners come to us for as independent mortgage brokers. To refinance means to break your currently mortgage and start a new one. During the pandemic’s unprecedented low rate phase, people were refinancing en masse to take advantage of lower interest rates and lower their monthly payments. Today, however, this is probably the most common tool for paying off high interest unsecured debt facilities. Most prominent lenders allow you to refinance at up to 80% of the value of your home, less any outstanding debt. So with property values still high (despite recent cooling), many homeowners are able to pay out their existing mortgage, cover any early payout penalties and still make out with more than enough cash to pay off debts, invest in a new property or even save for a rainy day. Some key things to keep in mind when refinancing include:
Know your current mortgage’s penalties for early payout before jumping in - some lenders could charge you tens of thousands of dollars to break your term
If you have the equity in place, refinancing could be a much more cost-effective option than a HELOC as you will be borrowing cash up front at the same rate as your mortgage, rather than at a higher variable rate
Second Mortgage
Second mortgages are sort of the unsung hero in the game of accessing equity, and they get a bit of an unnecessarily bad reputation. People tend to think of them as the trope in the movies that cash-strapped parents have to access to fund their adult children’s mistakes. In reality however, second mortgages can be an incredible tool for accessing equity without having to worry about the potential prepayment penalties that come with a refinance, or having to re-qualify from scratch. In fact, some lenders such as MCAP and RMG offer affordable, simple-to-access second mortgage products that make accessing equity quick and easy. Some of the major benefits of second mortgages can be:
If your credit has taken a hit from racking up multiple high-interest facilities, re-qualifying for a refinance to consolidate could prove burdensome. Enter, the second mortgage!
Even with slightly higher rates than many HELOC products, rates are still considerably lower than credit cards and unsecured lines of credit so they are a great, affordable tool for consolidation.
We are at an important moment in our economy right now, especially as homeowners. Taking advantage at all of the tools at our disposal to protect ourselves while growing our overall wealth is key! If you are considering accessing your equity now, no matter what the reason, let connect! Head to the link t the bottom of this page to schedule a obligation consultation and, in the meantime, check out our effective rate calculator below to understand how much interest you are currently paying, including your mortgage and other debts (click the link and save a copy to edit)
