All the different ways to access equity in your home

By: Jessica Vomiero on July 12, 2024

This article has been updated from a previous version.

Buying a home may seem like a one-time purchase, but it’s actually a long-term investment. As you continue to live in the home, the property should begin to appreciate and as a result, you will begin to build equity.

Your home’s equity is the value of your home minus the outstanding balance of your mortgage. This equity can come in handy later in life when you need to pay for renovations, consolidate debt, or maybe just make ends meet.

According to experts, the primary ways to take advantage of your home equity are through one of many “second mortgage” options, or by breaking your mortgage altogether and starting a new one — also known as a refinance.

Each of these options has its own advantages and drawbacks. This article will walk you through all the different ways you can access your home equity and when you may want to take advantage of each one.

Second mortgage options

A second mortgage refers to any mortgage taken out after a first mortgage. This includes homeowners who take out a home equity line of credit (HELOC) to use the equity in their home, or homeowners who choose to purchase an additional property with an additional mortgage.

A second mortgage is defined as any mortgage that takes second position to your first mortgage, meaning that if you should default on your payments, the loan on your first mortgage will need to be paid off before the second. While some second mortgages offer this option, not every second mortgage gives homeowners the option to utilize the equity in their homes.

The benefit of taking on a second mortgage is that you won’t have to pay the fees associated with breaking your mortgage. However, you’ll now be accountable for two separate loans.

Here are the second mortgage options that let homeowners access their home equity:

Home equity line of credit (HELOC)

A HELOC refers to a line of credit secured against the equity of the home. Homeowners only need to repay the equity they withdraw, which is very similar to a typical line of credit. This option benefits homeowners who are looking to quickly access money, as well as those who don’t know exactly how much money they’ll need – say, for renovations that might gradually increase in cost.

Because the HELOC is a form of revolving credit, homeowners who take out HELOCs will only have to make interest payments on what they borrow, as opposed to fixed payments.

However, interest rates for HELOCs are usually higher than mortgage rates. If you’re considering a HELOC, it’s important to weigh the risks as well as the benefits.

Borrowers should keep in mind that banks can raise the rate of a HELOC at any time or ask you to repay the entire amount whenever they like — even if you haven’t used the whole amount.

Furthermore, homeowners need to prove that they can afford to pay back the entire value of the line of credit when they take out a HELOC , not just what they’ve borrowed.

Home equity loan

A home equity loan has some similarities to a HELOC, though it bears more resemblance to a personal loan secured against the equity of your home. A homeowner who takes out a home equity loan borrows a lump sum against their home equity and must make regular payments, which includes a fixed interest rate.

Homeowners who are sure of the amount they’ll need may want to consider this option since they’ll be able to calculate the cost of borrowing as soon as they take out the loan.

Reverse mortgage

A reverse mortgage is an option specifically designed for elderly Canadians who have paid off at least 50% of their mortgage. A reverse mortgage allows senior homeowners to borrow up to 55% of the value of their homes.

No income verification is required, and you won’t have to make regular payments.

The maximum amount you can borrow is contingent on several factors, including:

Age: Both your age and the age of other individuals listed on the home’s title.
Home details: This includes your home’s condition, type, and appraised value.
Lender: The specific lender you choose.

Seniors might be interested in this option because they won’t be obligated to make a monthly payment until they sell their home or pass away, and they’ll also maintain ownership of their home.

Homeowners interested in reverse mortgages should keep in mind that this option can reduce the amount of equity they have to leave their family should they pass away.

There are only two banks in Canada that offer reverse mortgages: HomeEquity Bank and Equitable Bank.

Breaking your mortgage

Taking out a second mortgage isn’t the only option for homeowners looking to take advantage of their equity. Replacing your current mortgage with a new one, also known as breaking or refinancing your mortgage, is a way to access your home’s equity. Just like a second mortgage, this option comes with benefits and drawbacks.

Refinancing your mortgage

Refinancing your mortgage refers to breaking your current mortgage and beginning a new one at a different interest rate. You can access up to 80% of your home’s equity by increasing the value of your mortgage through a refinance.

Refinancing usually comes with lower interest rates compared to taking out one of the second mortgage options above. However, this isn’t the right option for homeowners who plan to leave their home soon.

Another benefit of refinancing is that some lenders might be willing to cover the costs, such as appraisal and legal fees, which can stretch into the thousands of dollars.

Whatever you do, don’t treat your home like an ATM

While your property can be a useful tool when looking for additional funds, it’s important to think carefully about any decision to access your home equity.

Generally, people typically tap into their equity for two reasons:

One is to undertake renovations or changes that will increase the value of their home – like putting in a swimming pool or adding an addition to the home. The second is to leave something to pass onto beneficiaries.

The main risk for homeowners is that they take too much equity from their homes and either leave very little to their heirs, or, in the worst-case scenario, they fail to repay the funds and are forced to foreclose.

So, while your home can be a great way to access funding and consolidate debt, make sure you don’t overdo it. Speak with your lender or a financial advisor about whether any of these options are right for you.