Home Equity Loans in Canada Best Explained

Home equity is the difference between the market value of your home and your mortgage, plus any other loans secured against the house. 

The equity in your home can increase in two ways;

• Appreciation of your property value: Generally, when the market value of your property improves, your equity stake in the property also increases. Let’s assume that a house you bought for \$350,000.00 two years ago with a \$330,000.00 mortgage loan is now valued at \$550,000.00. It means the home equity value in the house increased by $200,000.00 over the two years. You can convert part of this $200,000.00 value into cash with a Home Equity Loan program.  
• When you pay down your home loan, as you make the regular mortgage payment, part of it pays down the mortgage loan on the house. This payment helps to reduce your mortgage loan, which in turn increases your equity value in the property—continuing with the above example of the 350,000.00 property you bought two years ago with a \$330,000.00 mortgage loan. 
  • Over the past two years, you have made a total payment of $34,000.00, of which $14,000.00 was the interest cost, and $20,000.00 goes to pay down the loan. 
  • As of today, your mortgage loan balance is $310,000.00 ($330,000.00 – $20,000.00)
  • Over the two years, you have increased the equity value of your home by $20,000.00
  • In addition to your initial down payment of $20,000.00, your total equity value is $40,000.00

The good thing about your home equity is that you can use it as collateral to get a low-cost term loan or line of credit. The loan can help you finance your home renovations, your children’s education, or a down payment on a second home.

There are two ways you can use your home equity to borrow money 

• Home equity loan 
• Home equity line of credit (HELOC)