Using Your Home Equity for Renos (+ Other Goals)

Home equity can be a powerful financial tool, giving you the opportunity to leverage all the value you’ve built in your property to achieve other goals - things like renovating your home, consolidating debts, or investing in other opportunities.

Let’s talk a bit about Home Equity - what is it and how can you access it, what you can use it for, and what to be wary of…

What is Home Equity?

Home equity is the difference between your home’s current market value and the outstanding balance on your mortgage. As you pay down your mortgage and as your home’s value appreciates, your equity increases.

For example, if your home is valued at $500,000 but you only owe $300,000 on your mortgage, you have $200,000 in equity.

How much could I borrow?

For a property you live in, you can generally borrow up to 80% of the value of your house.

So to work that out, just calculate what 80% of your house value is. For example, if your house is currently worth $500,000, you could potentially borrow up to $400,000 (80% of 500K is 400K.)

How much do you currently owe on your mortgage? Deduct that from the figure you got in the 80% calculation. What is left is how much ‘extra’ you could potentially borrow.

Investment properties are a little different - you can generally borrow up to 70% of the value of the property. (Note this is specifically for the main banks - some non-bank lenders might enable you to borrow up to 80% of your combined value, but the interest rates are generally higher.

Of course, you’ll need to meet other bank criteria for affordability and loan purpose.

How do I access my Home Equity?

There are two primary ways to access your home equity:

1. A Home Equity Loan (‘HEL’)
   A Home Equity Loan is a second mortgage that provides a lump sum of money which you repay over a fixed term with fixed repayments. This option is ideal for large, one-time expenses like major home renovations.
   

2. A Home Equity Line of Credit (‘HELOC’)
   A HELOC works more like a credit card, giving you a revolving line of credit that you can draw from as needed, up to a predetermined limit. You only pay interest on the amount you borrow. This flexibility makes it suitable for ongoing expenses or smaller, periodic projects.

Using Home Equity for Renovations

Renovating your home can enhance its value and improve your living experience. Here’s how to strategically use home equity for renovations:

• Focus on renovations that increase your home’s value - such as kitchen upgrades, bathroom remodels, and energy-efficient improvements. Studies show that projects like minor kitchen remodels and bathroom renovations often yield high returns on investment.

• Determine how much you need to borrow based on detailed cost estimates for your renovation projects. (And make sure that budget includes a contingency fund for unexpected expenses!)

• Based on your renovation needs and budget, decide whether a home equity loan or line of credit is more appropriate. For a large, single project a HEL might be better, while a HELOC is ideal for multiple/smaller projects.

• In some situations, you may want to do renovations that might cost more than the equity you have available to borrow. There are circumstances where the proposed renovations would add value to the house, therefore when completed the value of the house might be higher than it is currently. In this situation, you can get a registered valuation off any renovation plans you have had drawn up.
  
  The registered valuer can provide a proposed valuation assuming the works have been completed. The banks can actually consider the proposed value when calculating the 80% or 70% maximum loan amount. (They do build in some cost buffers though, and this can be 10-15% on top of the proposed costs - there are a few different ins and outs here, and we can help you navigate those.)

Using Home Equity for Debt Consolidation

Using home equity to pay off high-interest debts like credit cards and personal loans can reduce your overall interest payments. Consolidating debt into a single, lower-interest loan simplifies your finances and can also improve your credit score over time.

Using Home Equity to Invest in Property

You can use home equity to invest in rental properties or other real estate opportunities. This can diversify your investment portfolio and generate additional income streams.

Using Home Equity for Educational Expenses

Funding education for yourself or your children can be another smart use of home equity. This investment in education can lead to higher earning potential in the future.

Using Home Equity for an Emergency Fund

Establishing an emergency fund using home equity ensures you have access to funds for unexpected expenses like medical emergencies or major repairs without resorting to high-interest credit options.

Risks and Considerations

While leveraging home equity can offer many benefits, it’s important to consider the risks:

• Increased Debt: Taking out a home equity loan or HELOC will increase your overall debt load. Ensure you have a solid plan to repay the loan to avoid financial strain. Failure to repay/missing your payments could result in the bank requiring you to pay your entire outstanding balance in full, and the bank could sell your home and/or any relevant security.

• Market Fluctuations: Property values can fluctuate. If your home’s value decreases, you could end up owing more than your home is worth, which is known as being "underwater."
  
  

For more detailed information on home equity loans and lines of credit,
or to discuss your specific needs, contact our mortgage brokers today
- we’re here to help you make the most of your home equity and achieve your financial goals.

Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.