Ways to Unlock the Value in Your Home
For most Canadians, the house they own (or hold a mortgage on) is the biggest asset they have; sometimes it’s really the only asset! This means that if you need some extra cash for things like home repairs, renovations or anything else which can come up in life, you will probably be using your home as a way to leverage more money out of a bank in the form of a loan or line of credit. Using your home’s value to get more money is known as unlocking the value or equity found in your home. Home equity is the difference between what you owe on your home and what the home is valued at. The more you have paid down on your mortgage, the more equity you have built up in your home.
There are two kinds of loans based on using home equity: a HELOC or Home Equity Line of Credit or a Canadian Home Income Plan (CHIP). Both ways of getting money out of your home have their advantages and their things to be mindful of.
A HELOC is a line of credit that uses part of the equity in your home. Rates are potentially changing from 80% home to value down to 65% home to value in response to fears that too many Canadians will use this method of getting money and end up too deep in debt.
Home equity loans are great because they give you more flexibility. The loan is a lump sum of money which you can use for anything you like and you pay it off the same way you’d pay off your mortgage; in fact, HELOCs are also known as second mortgages because you are basically taking out a new mortgage that can be used to buy anything, not just a house, though some people may get a second mortgage in order to get a down payment for the first mortgage! (This is how you can have 0% down payments).
Keep in mind though that Home equity loans do carry interest rates, which means that it will take longer than you might have thought to pay off the balance. And you may only be able to borrow up to 65% of your home to value ratio under new regulations.
Canadian Home Income Plan
The Canadian Home Income Plan (CHIP) is also known as a reverse mortgage. What it does is allow you to unlock up to 50% of the value of your home and get that money either as a lump sum, several payments or monthly pay-outs. This form of home equity though is more restrictive: you have to be over the age of 55, you have to own the home, and if you try to move, you’ll have to pay back the amount you received through your CHIP.
The CHIP is highly beneficial though for a few reasons. You don’t have to pay back the amount you use unless you sell the house and move. The money isn’t taxable, so you don’t have to worry about your pension being affected. And you can use the money for whatever you want. If you do choose to repay your CHIP in order to keep your heir from having to when you pass away or if you plan to move in the future, the interest rates are fairly reasonable.
Keep in mind that for any home equity loan, you will have to have a good credit history and you will have to get your home appraised in order to get the most up to date value of your home. Appraisal costs do come out of your own pocket, as does any legal advice you may want to take before taking out a CHIP or a home equity loan. However, this amount of money is pretty negligible when you consider how much you can take out of your own home. You should always make sure to seek some form of financial advice to ensure that a loan or a plan like these is suitable for your needs.
It’s your home; you should be able to use it! HELOCs and CHIPs are a good way to get more money out of your primary asset, so they are well worth considering if you find yourself in need of a lump sum of money or more money every month.
If you have additional questions about this topic or others, please contact us at Higgelke Mortgage Group.