Using home equity to buy another home Canada – is it worth it? Under Canadian rules, you are completely free to decide how to use the equity in your home – and buying a new home is just one option.
The equity of the property purchased can be considered one of the most valuable assets a person has. Once someone starts making payments on a home loan, they begin to increase the value of their home. The more equity you build, the more you can make out of it in the future when you decide to finance something important. You can use the built up value for several options, from buying expensive things for your home to paying off existing debt.
One of the most popular options is to start using equity to buy another home Canada. Even if you are faced with unexpected costs in an emergency, you can use the equity to get funds and cope with the situation.
How can I estimate the equity in my house?
Let us say you have been paying your home mortgage for almost ten years. In that long time, you have certainly built up equity in your home. To determine a specific amount of equity you have built up, you would need to hire specialists to appraise your home. But if you are just curious and want to know the approximate cost, you can do the following simple calculations.
Let us say the value of your home is $500,000.
If we take 80% of the value of your home, we get $400,000.
The amount you still have to pay for a mortgage is: $350,000.
If we subtract from 80% of the value of your home the amount you still owe, we get: $50,000.
From this we can conclude that you can get a second home for $50,000 or less.
Please note that these calculations are approximate. You would not know the real numbers until you have an appraisal done on your home.
Using home equity to buy another home Canada or for other purposes
You should take advantage of this type of loan if you need funds to buy a new car, make improvements to your home, for your business, or for your children’s education. It could also be a good idea to use equity to buy another home in Canada.
The best thing about this loan is that it allows you to get a large amount of money in one lump sum for any purpose.
Tools to access the equity of the house
There are several widely known ways to access your home’s equity: you can refinance, apply for a second mortgage, use your HELOC, or qualify for a home equity loan.
Positive and negative sides
Like any other instrument, this one can have positive and negative effects on your financial situation.
- You can use the equity you build to increase the value of your home. It’s easy to do: you get additional funds to renovate or improve your home. This might be a good idea if you plan to sell your home in the near future.
- You can claim a tax deduction. The positive aspect is that the interest on the funds used is tax deductible.
- You are free to decide what you want to spend your money on. The best part about this deal is that you can use the deducted funds for anything from funding your children’s education to travelling to other parts of the world.
- Number of fees you would have to pay. You cannot access the funds without paying the required fees. The list includes: Application and appraisal payments and any other type of legal documents.
- Flexible percentage. You should be prepared to pay more for the interest portion of the loan, as the percentage can fluctuate up and down due to market changes.
- Risks. You may decide to use your money for some investment opportunities. The idea may be perfect, but it is also risky. You may lose the invested money due to the market condition. It is also very likely that you will have to pay taxes on the amount invested.
- You can lose your house. You can lose all your money if you act carelessly. If you default and stop making regular payments, your home could be foreclosed. You need to make sure that you are able to continue making your regular payments wherever this happens.
Using Home Equity To Buy Another Home Canada: Changes in the rules
In October 2016 there were some changes in the housing rules of Canada. According to newly set rules the potential buyer can only pretend for a house he can afford to buy. It has been made due to raising the amount of families in Canada in debt that couldn’t proceed with making regular payments and faced financial problems. It is explained by the fact that families in Canada are not in the mood for making financial strategies for years ahead and just take credits without making extra thoughts. So in case of any financial difficulty they stop making payments as they can no longer afford it.
The Government tries to solve the situation by making mortgage rates steadily decline in recent years and making houses in suburbs more affordable. However, no one knows what would happen to the percentage rates in the future and how the prices for real estate would behave. Taking into account that the rate might increase the next year the government made certain changes in rules.
Using Home Equity To Buy Another Home Canada: Final thoughts
It is entirely up to you how you use the equity built into your home – under the rules, you are absolutely free to choose. Many Canadians tend to buy a new home. However, it would be wise to thoroughly consider all available options to avoid unnecessary risks. It is always a good idea to consult a financial advisor in case you have any issues.