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“How much can I borrow against my property in Canada?” That is a question we get asked often. So if you are thinking about pulling equity out of your primary residence, vacation property, rental, or raw land, read on as it’ll explain ways we can help.
“Most everyone is aware that you can take equity out from your real estate”. The question for most is “how” and “what is the most cost effective or easiest way to do it?” For many years one of the easiest has always been a Home Equity Line of Credit, otherwise known as a HELOC. What many people are unaware of is that a HELOC is a collateral mortgage. That in itself has its pros and cons.
In this article we’ll take a look at the ins and outs of the decision to take equity out of your property and go over some scenarios in which it makes sense – and some others in which it might not. But first, let’s explain what home equity means and give you an example.
What Does Equity Mean?
A lot of our customers ask us just what “equity” means. Imagine your house as a giant aquarium. As you pay off your mortgage, imagine that aquarium filling up with water. When the aquarium is full to the top, then the house is paid off, and it’s all yours. The “equity” is the amount of water – the amount of the home’s value that you own.
Let’s say that you bought a rental property for $500,000. You had initially put $125,000 down, and you now have a balance of $200,000 remaining on the mortgage. However, if you conducted an appraisal, and it came back at $600,000, then you now have $400,000 in equity on the property. Depending on the lender, you may be able to access up to a maximum of between 65% – 80% of the property less the amount owed. Assuming 65%, of $600,000 less the existing balance of $200,000; you’d be able to access $190,000. At 80% of the property’s value, that jumps up to $280,000.
So if you have all that money sitting in equity, and you’ve come to a point where you need to use it, then taking out a loan or line of credit on that equity can make a lot of sense. Maybe you have a youngster heading to college. Maybe you have a chance to invest in another property on the same block, but you don’t have enough to cover a down payment large enough to give you a prime interest rate. These are all good reasons to take out some of your home’s equity. If you live in a major urban market, you can take as much as 65% -80% of your equity out in a loan (combined with your existing mortgage), while that usually tops out around 50% – 65% in rural markets with some lenders. In cases where you are pushing the limits of your equity, private lenders can use multiple properties and provide you with a blanket equity mortgage; also known as an inter alia mortgage. Traditional Banks and Credit Unions are rarely able to accommodate this for a typical residential mortgage loan request.
Here’s a warning… If you do take out a home equity loan, or if you do use some of your home equity line of credit, that loan has the same force as your original mortgage. So if you fall into default on this loan, the lender can foreclose, just like your original mortgage lender can. So make sure you have it in your budget to make those payments on top of your regular expenses. You don’t want to get into a bind six months or a year down the road.
A Home Equity Example
It’s the difference between the market value of your home, as determined by an appraisal, and what you owe on the mortgage. If you bought a house for $750,000, and you’ve paid down the balance on the mortgage to $250,000, but the value of the home has gone up to $900,000 in the years since you bought it, you have $650,000 in equity on the house. You can take out a home equity loan, home equity line of credit (HELOC) or cash-out refinance in order to get the money out so that you can buy another house, provided you meet prime lender credit and affordability requirements.Now that you are clear on what home equity is and how it works, let’s dig into how to take equity out of your rental property.
How To Take Equity Out Of Rental Property
There are two common ways to take equity out of rental property: a home equity loan, or a home equity line of credit (HELOC). Both of these use the investment property as collateral, and you pay back what you borrow over time at a pre-set variable or fixed interest rate. If you do not qualify for this, the only other options would be to refinance your rental property to the required amount or the maximum allowed Loan-to-Value. The other option is to take out a private equity second mortgage.
Have you been building up charges on your credit cards as you try to make ends meet?
Then a HELOC to pay off those charges could make sense. Credit card balances often carry a much higher interest rate than a HELOC would. So you’re smart to save money.
What if you’re not in a bind financially, but you want to make some major improvements?
If you don’t have the cash on hand, taking out a home equity loan (2nd / 3RD Mortgage) or HELOC to cover those expenses, and then to pay the loan back, can be less expensive than charging the cost of the renovations and then paying back those balances off your card.
It’s common knowledge not to squander your Home Equity on depreciating assets or on material objects like a flashy sports car due to a mid-life crisis, but it’s easier said than done. Home Equity Lines of Credits have been the ATM for Canadians and it has been a major profit source for all the Major Banks. The intention for most Canadians is to use the HELOC and pay off quickly, but for many these accounts sit at or near max limits. It’s expected that due to soaring home equity lines of credits, that Banks will be making it harder to qualify. This is especially true in 2020 as we navigate the pandemic.
How To Take Equity Out Of Your House To Buy Another
There are some parts of Canada (primarily Toronto GTA, Vancouver Surrounding Area, and the Okanagan) where the prices of real estate shot up over the past decade. With the state of the national and global economy; sharp increases are unlikely for the next 12-24 months. Some markets may even see dips. If you’re a liquid investor great opportunities to invest can be attained with prudence and due diligence. However, if your liquidity is on the low side, where do you get the funds?
You can take out a mortgage, or you can sell some of your other investment assets, such as bonds or stocks, or you can raid your RRSP, or you can take out equity to buy a second home using either a home equity line of credit (if you qualify) or easy qualify equity based private second mortgage.
Take Out Equity To Buy Second Home
If you want to take equity out of your house to buy another, there are some real benefits. You’re likely to get a better interest rate and lending term from the bank, because you have more at stake – two properties with collateral. If you take out a second mortgage to buy that second home, you represent a higher risk than someone who refinanced their primary residence to make that purchase. If you run into financial difficulties, you’re more likely to let a second home go into foreclosure if that loan doesn’t jeopardize the place where you live. You can save on this loan, because you won’t have to pay fees for title searches or many of the other costs that go with taking out a new mortgage, because you’re accessing the equity in a home you already own instead of asking for financing to purchase a separate one.
There are some drawbacks to this too, of course. You will now face a higher mortgage payment each month when you take equity out of your house to buy another property. If you plan to rent out the second property, that income can counteract the higher payment. However, if you run into financial trouble and can’t make the payments, your primary residence is the collateral – and it is what the bank will come after if you go into default.
If you are planning on investing in a second home to “flip” it – or make some improvements and then sell it at a profit, then you won’t have that larger mortgage payment for long, because you can take the profits and use it to pay down that larger mortgage or save some of the money and then reinvest the profits elsewhere.
If you are planning for this second home to be a vacation home, you could consider renting it out on the weeks when you don’t plan to use it. That secondary income can help you with that larger mortgage that you have now as well. There are many property management companies that can help you manage a rental property either in your own city or in a place on the other side of Canada.
Planning to use it as a rental property with a full-time tenant?
You’ll still have money rolling in once the lease gets signed, which should help you with those mortgage payments. Once again, though, you don’t want to take on a mortgage payment that you can’t handle – even if you have zero income coming from the rental property. Don’t let your primary residence end up be the one facing foreclosure because you gambled the place where you and your family live – and you lost.
If you have other questions about accessing equity from your home, an investment property, land or commercial real estate, please contact Amansad Financial today. Your personal situation can be reviewed so that a recommendation can be made as the best course of action.
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