For generations of Canadians, buying a house has served as one of the most reliable investments for middle- and working-class families alike. Instead of watching your rent money disappear every month with no return, a mortgage is a way of building up an asset that will provide financial stability for decades to come.
Even before you finish paying off your mortgage, the amount of value you own in your property — known as home equity — can help you access capital and pay off debt. And with housing prices rising steadily across Ontario, many homeowners can generate large amounts of equity by simply letting the market do its work.
But while market forces play an important role in growing your investment, if you want to see your share of equity grow even faster, there are a few things you can do to speed the process along. Here are five of the most significant.
1. Make a Big Down Payment
If you haven’t purchased a property yet, the easiest way to ensure that you start out with a large amount of equity is by making a big down payment. Putting a large amount of money down at the beginning means you own a larger percentage of the house outright.
In Ontario, the rules around minimum down payments depend in part on the price of the home itself. If you’re buying a condo for under $500,000, a 5% down payment will be enough. If the property is between $500,000 to $999,999, you’ll need 5% of the first $500,000 and 10% of the for the portion above $500,000. Homes in excess of $1 million require a 20% down payment.
However, if you are putting down less than 20%, regardless of the price, you will need to pay mortgage loan insurance, which is why it’s generally a good practice to wait until you have at least 20% saved up before getting a mortgage. This will mean that you start out owning a fifth of the home’s initial value, though this will rise as you make your payments and the value of the house increases.
2. Increase Your Mortgage Payments
Once you’ve started paying your mortgage, the fastest way to gain equity outside of the market is by increasing your monthly payments, or by making lump sum payments.
Your sources of income will determine which of these options is best for you. For example, if you have the financial flexibility to increase your monthly payments by cutting out other expenses, this is probably a good idea. If, on the other hand, you have a more irregular cashflow, with more coming in at certain times of year, sticking with your agreed-upon payment plan while making lump-sum contributions when feasible is a safer bet.
3. Get a Shorter Loan Through Refinancing
Another way to increase the speed at which you generate equity is through refinancing your mortgage along a shorter timeline.
Refinancing a mortgage essentially allows you to replace your existing mortgage with a new one, which gives you a chance to take advantage of lower interest rates and to change the terms of the mortgage agreement. If your yearly income has gone up significantly since you first negotiated the mortgage, for example, you can refinance with higher monthly payments.
Alternatively, you can lower the payments in the event that you are experiencing financial difficulties, or use the equity you have already built up to get a lump sum cash payment.
If you want to learn more about refinancing your mortgage in Ontario, get in touch with Burke Financial to explore your options.
4. Invest in Your Property
Because home equity is tied to the market value of your property, another way you can improve home equity is by making strategic investments in your house. Refinishing a basement to add additional units, expanding and remodelling the kitchen, installing skylights — all of these renovations can make your property more attractive to potential buyers.
If you don’t have the savings to cover major home renovations, you can actually use existing home equity to increase the value of your home by taking out a home equity loan.
Home equity loans allow you to borrow against the equity you already own, which means they are often available at lower rates of interest than an unsecured loan. If you want to know more about the difference between a home equity loan and second mortgage and which is a better option, get in touch with Burke Financial to learn more.
5. Use Home Equity Loans Strategically
As we discussed in the previous point, home equity loans can be a fast and effective way to unlock the funds you need to invest in your property. But home equity loans can also be used for a variety of different purposes, including debt consolidation.
While these loans can be an excellent way to get your finances in order, it is important to know how a home equity loan works before you take one out. If your goal is to increase your overall home equity, it is important to use this kind of loan strategically.
Home equity loans function as an additional loan that takes second place to your original mortgage, meaning that if you get a home equity loan in Ontario you will need to manage it on top of your original mortgage.
For this reason, it is best to use home equity loans strategically, in a way that will put you in a better financial position. If you are putting that money back into the house in a way that will offer a good return on investment, or if you’re using it to pay down toxic debt that is holding you back, then a home equity loan can be a prudent choice. If you just want to finance a holiday, all you’ll end up doing is reducing your total equity.
Growing your equity as quickly as possible can be a good idea for a number of reasons. Not only will you have total control of your property sooner, it will also give you more financial leverage if you need to raise a large amount of money for a purchase or an expense. You should think of your equity as a form of capital that can help you grow your wealth and secure credit.
If you want to know more about how a home equity loan or mortgage refinancing can help you improve your home equity, call Burke Financial today.