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The two most significant factors that affect your equity are property values and mortgage amounts. If you have no mortgage, then the entire value of your home is considered part of your equity. That said, if you’re looking for access to your equity without selling, then you’ll only have access to a portion of it, depending on how you’re looking to access the funds.
The Formula for Calculating Equity
The formula that allows you to calculate home equity is actually pretty simple. It’s the market value of your home minus what you owe on your mortgage. Here are a few examples that show home equity using this formula.
| Property’s Market Value | Mortgage Amount Owing | Home Equity Amount |
| $410,000 | $223,000 | $187,000 |
| $599,000 | $120,000 | $479,000 |
| $387,000 | $300,000 | $87,000 |
As you can see from these few examples, it’s actually pretty easy to calculate. What you might be wondering, though, is where you found this information.
When you’re calculating home equity and need your home’s current market value, the simplest way to find it is through your annual property assessment. This assessment will show the your home’s appraised value at the time your home was assessed. It’s generally done around the time that property taxes are issued. That said, if you’re looking to access your home equity, the financial institution you’re working with will also perform an updated assessment of the home. If you’re looking to sell, a real estate professional can also do a professional appraisal.
When it comes to finding out how much you owe on your mortgage, also known as your current loan balance, all you need to do is speak with the financial institution where you hold your mortgage. Many financial institutions will even show this information on your online account.
How Much Equity Based On Years You Own The Home
How long you’ve owned your home will impact its equity, but the more important factor is how much you owe. If you purchased your home without a mortgage and have only owned it for a short period of time, then your equity would be the your home’s market value.
Another factor that makes a difference in your home equity is the loan to value ratio. This compares how much your home is mortgaged for versus the value of the home. This loan to value ratio, or ltv ratio, is what’s also used when your remortgage your loan term.
1 Year
While home values are known to appreciate over time, there’s no guarantee that your home’s value will appreciate in the first year. That said, the average home value appreciation per year is around 3%. Here’s an example.
Say you purchased your home for $700,000, and your down payment was $140,000 at a mortgage rate of 5.52%. Your mortgage monthly payments were made on a biweekly basis, so you were able to put a little extra down. This means that you would have made around $11,307 in principal payments (depending on the province you’re in). If your home value increases to $721,000 and your total outstanding mortgage balance is $548,693, then your total equity in your home is $151,307.
2 Years
Using the same appreciation value, owning your home for two years would roughly mean that you gained 6% in your home value. You also would have made more principal payments than you would have if you only owned the home for one year. Let’s look at another example using different amounts.
If you purchased your home 2 years ago for $650,000 with a down payment of $130,000 and had a mortgage rate of 6.04%, then your equity is going to be different after two years. Using the formula above, the value of your home would have gone up by 6%, making it worth $689,000. The total outstanding balance would be $491,502.12. This means your total equity in the home would be $197,497.88.
10 Years
Unless the country is in a recession, it’s likely that you’ll have some decent equity in your home after owning it for 10 years. This is especially true now if you bought 10 years ago since the average prices then were a lot lower than they are now. Let’s take a look at an example of what your equity could be if the value increased by 3% per year. However, this will be a little different since you’ve likely had two mortgage terms at two different interest rates.
For this example, let’s say you purchased the home 10 years ago for $600,000 with a down payment of $120,000 at a rate of 3%. If you paid that mortgage for 10 years, the total principal owing would then be $364,895.08, while the appraised value of the home would be around $780,000. This means your total equity in the home would be $415,104.92.
How Much Equity You Can Borrow From Your Home
If you’re looking to access the home equity values in your home, then how much you have access to is based on how you’re looking to borrow it. Let’s take a look at a few ways that you can access your home equity. Each of these way involve loans secured to your home.
Home Equity Loan
If you need to borrow money but don’t want to traditional personal loans or other loans, one of the other financing options used by many homeowners is a home equity loan. This allows you to gain access to up to 80% of the available equity in your home. That said, you can’t access any equity that’s mortgaged. You can only access up to 80% of the value of your home that isn’t mortgaged. This is because a home loan is technically a second mortgage, so your first mortgage, also referred to as your primary mortgage, isn’t included in what you’re borrowing against.
The reason that many Canadians would choose second mortgages over traditional loans is because these types of loans have lower interest rates. The reason that banks do this is because the loan is technically a secured loan, and it’s attached to your home. As long as you make all of your payments on time, you won’t run the risk of losing your home.
Home Equity Line of Credit
Home equity lines of credit, commonly referred to as a HELOC, is another way you can gain access to your home’s equity. Unlike home equity loans, HELOCs are a type of revolving credit, meaning that they can be used over and over as long as you pay them off. However, you have less access to equity with HELOCs.
In Canada, HELOCs allow you to gain access to up to 65% of the non-mortgaged value of your home. For example, if your home is worth $700,00 and you owe $300,000, then you would be able to get a HELOC for a maximum amount of 65% of $400,000, which is $260,000.
While HELOCs give you less access to your home’s equity, they’re popular because they don’t have set payments like a loan. The amount you must pay every month is based on how much you owe on the HELOC. The mandatory payment is only the interest owed on that amount. After that, you can put as little or as much on the principal payment as you like. Like a home equity loan, a HELOC is also a form of secured credit.
Reverse Mortgage
Reverse mortgages are a type of home loan that is available to those who own their own home and are age 55 or older. It allows you to gain access to your home equity without selling it and is considered to be a tax-free payment. This means it doesn’t affect your pensions or annual taxable income.
While reverse mortgages are similar to other types of home loans, they’re also more expensive. They often have higher interest rates than other ways to access your home equity. They also come with all sorts of fees, such as on-site appraisal fees and set-up fees.
Cash-Back Mortgage
Cash Back mortgages are a type of mortgage you can get when purchasing a new home. Essentially, these mortgages give amounts 1% to 7% higher than the cost of the home to allow access to extra cash. This can be used for lawyer fees, home improvement projects, renovation projects or closing costs. Really, what you spend the money on is up to you, but that amount is then added to your mortgage.
Ways To Increase Your Equity
If you want to increase the equity in your home, as well as your ownership stake, the simplest way to do that is to reduce the amount of your existing mortgage. You can do this by:
- Increasing your payment frequency
- Putting a lump sum down
- Increase your current mortgage payments
Another thing you can do is do home improvements to increase its value. However, the less you owe on the home, the more equity that you have.
Final Thoughts
While owning a home in Canada can be expensive, it does come with the added perk of having equity which can improve your financial situation. Instead of paying rent, you’re essentially paying yourself and the less you owe on the home, the more equity you have.
That said, the equity that you do have in your home will change based on your home value. This is because the equity is calculated using the current market value of your home instead of the purchase price of your home. In most cases, this can benefit you. However, in the case of a recession or economic downturn, you could feel the negative effects. However, historically, home prices have always turned around, and home values have always increased.
If you’re looking to access the equity in your home, then it’s important to know how much you owe as well as what your home’s value is. This will allow you to calculate equity you have in your home and give you an idea of how much you can access. If you’re looking to access this amount to help your personal finance situation, then you should speak to your mortgage lender, who can help you through the process.
