Owning a home comes with many benefits as compared to renting. When you own your home, you can:
- Be sure you aren’t going to face eviction if your landlord decides to sell
- Make changes and improvements that suit your tastes
- Know that the money you pay toward your mortgage will one day come back to you in the form of a concrete asset that will appreciate in value.
But while we tend to talk about the financial benefits of homeownership as it relates to the long-term (for example, that owning a house is a great way to guarantee you have a retirement nest egg) there are many short-term financial benefits to buying property. Perhaps the greatest of these is that you can tap into your home equity to fund other projects and investments through a home equity loan or second mortgage.
The main difference between a home equity loan and a mortgage is that a home equity loan functions as a second mortgage, but not all second mortgages take the form of home equity loans. It is also possible to get a second mortgage in the form of a home equity line of credit (HELOC).
Part of the home equity loan definition is that it is a second mortgage — a mortgage on the amount of equity you own in the property. And though the interest rate is generally higher than it would be on the original mortgage, it is still substantially lower than an unsecured loan would be.
For this reason, getting a home equity loan is one of the best ways for a homeowner to raise large amounts of money without having to pay exorbitant rates of interest.
But because it involves borrowing against the value of your home, it is essential to use that money strategically. In this article, we’ll outline four of the best ways to use a home equity loan, and provide some tips for how to get the best rates by working with a mortgage brokerage that specializes in residential loans.
1. Debt Consolidation
Given how pervasive the issue of debt has become in Canadian society, it is no surprise that one of the main reasons why homeowners might want to borrow against their home equity is to consolidate a number of high-interest loans into a single, manageable, low-interest loan.
For those who have seen their debt load spiral out of control during the pandemic, debt consolidation is usually the first step toward regaining control over one’s finances and charting a course toward debt freedom.
The problem is that when you are deep in debt, borrowing enough money to apply for a consolidation loan can be extremely difficult. If your credit score has fallen below 650, you may not be eligible for bank loans or lines of credit — or you may have to pay such a high rate of interest that the benefits of consolidation become negligible.
Because a home equity loan is a form of secured debt, taken out against a concrete asset that is only likely to grow under current market conditions, it is one of the safest and most affordable ways for homeowners with a bad credit score to fund debt consolidation.
2. Home Repairs
The main downside of owning property is that you have to maintain it. When the plumbing goes, or the basement floods, or you need a new roof, you’re on the hook for the cost of those repairs — and that cost can easily run to the thousands or even tens of thousands of dollars.
If you have emergency repairs that need to be taken care of, a home equity loan in Ontario is an affordable way to borrow large sums. And applying for a home equity loan through a mortgage broker is the fastest way to unlock those funds: at Burke Financial, the online application process can be completed in a few minutes, and you could have the money in as little as two business days.
Credit: Burdun Via Freepik
3. Renovations
In the current economic climate, your home is almost guaranteed to increase in value over time. Canadian real estate promises an incredible return on investment even in the short term, and many Canadian homeowners have become millionaires simply by making their monthly mortgage payments.
But if you want to increase the value of this investment, there are plenty of things you can do to make your home even more attractive to potential buyers.
For example, you can:
- Build an addition
- Finish the basement
- Install new windows and doors
- Buy solar panels
- Renovate the kitchen
- Put in an additional bathroom
Some of these renovations can even start turning an immediate profit: a finished basement can be rented out, for example, and solar panels can help you reduce your electricity costs.
Using your home equity to secure a home improvement loan to invest in one or more of these projects is a great way to get a strong return on investment while also making your home more comfortable.
4. Real Estate Investment
Buying one house is a great way to improve your quality of life while saving for the future. Buying an additional house can be the first step toward creating your very own real estate portfolio.
If you want to purchase an additional property to rent out, your home equity could provide the seed money to take out a mortgage. If you’re purchasing a condo, for example, a 20% down payment could cost around $150,000 — but with most mortgage brokerages offering around 85% LTV, having at least $200,000 in home equity would be more than enough to do so.
While you need to be careful not to become over-leveraged, if you’ve built up a considerable amount of equity and have a secure income, getting in touch with that a mortgage broker who specializes in residential loans to start exploring your options is a good idea.
A home equity loan is one of the most powerful borrowing tools at the Canadian homeowner’s disposal. Whether you’re looking to consolidate debt, fund repairs, undertake a renovation project, or invest in more property, get in touch with Burke Financial today to start exploring your options.
