Leveraging the equity in your home

Use home equity to build your wealth

Thanks to a strong real estate market, particularly here in BC, most homeowners are sitting on more equity than they realize. By tapping into the value of your home equity, you can use it to grow your wealth for tomorrow or help enrich your lifestyle today.

There’s no doubt that home ownership in British Columbia, particularly in the Lower Mainland, has been a solid, long-term investment. With our beautiful environment, strong housing demand, and international presence, this is one of the hottest real estate markets in Canada.

While real estate prices continue to trend higher and higher, it might be tempting to think of home ownership as an easy route to building a retirement nest egg. But as with any other asset, having too much of your net worth tied up in your house can be risky. Markets can fluctuate, even in real estate, and occasionally experience sudden and sharp price drops – timing is critical.

Unlocking your home’s value

One way to take advantage of the home equity you’ve built is through what’s known as “leverage” or borrowing to invest. Leverage, when used wisely, can help you better diversify your assets or provide income to enhance your lifestyle.

Carrying debt will often hold you back in growing your wealth, but using leverage is different. When you borrow to invest, the interest charges you incur can be tax deductible. And the higher your tax bracket, the greater your savings.

Dollar for dollar, deducting interest expense through leverage creates the same tax savings as contributing to an RRSP, regardless of tax bracket. Investing the borrowed funds in tax-preferred choices like dividend-producing investments can further enhance your returns.

For most people, a practical way to get started with a leveraged investment strategy is to first establish a home equity line of credit. Secured by your home’s value, this line of credit can offer lower borrowing rates and more flexibility than alternative home equity options like reverse mortgages.

How leverage works

When you’re using borrowed money, you’re putting more capital to work than you otherwise could. For this reason leverage can lift your total investment returns beyond what would be possible when not using borrowed money.

Here’s a simple example.

Let’s say you borrow against your home equity and still invest $4,000 of your own cash. Assuming you borrow $100,000 at an annual loan rate of 4% and place it in an investment that generates a 5% return annually. After paying $4,000 in interest out of your returns, you would have pre-tax $1,000 which is five times the amount of income you would have generated if you just invested your $4,000 at 5% and received a total annual income of $200.

Your home as a financial asset

Tapping into the equity built up in your home is a smart way to finance other investments such as a vacation home, rental property, or bumping up your retirement portfolio. You can do this by taking out a home equity line of credit. Your financial advisor will be able help you assess how to best accommodate your needs.

Home equity line of credit – ongoing cash on demand

A home equity line of credit (HELOC) is a variable-rate revolving credit line more akin to a credit card with a maximum spending limit. Homeowners can borrow money, pay it back and then borrow more as needed. Accessing the funds is easy.

Since interest is charged only on the money that's actually borrowed, a HELOC works best for those with ongoing needs like recurring expenses or a long-term home-improvement project. It may also be useful in case of an emergency, such as an unexpected job loss.

How much can you borrow?

Borrowing levels depend largely on how much your home is worth. In a strong housing market, you can usually tap up to 65% of the appraised value of your home (known as the loan-to-value ratio), minus the remaining balance on the first mortgage.^*** For example, if your condo is worth $800,000 and you owe $400,000 on the first mortgage, you can borrow up to $120,000, assuming that payments can be met.

An easy application process

Applying for a home equity product involves the same process as a mortgage. Most lenders will appraise the property, run a credit check, and look for confirmation of your income. If you're planning to invest in a rental property, the monthly income can be used to service the loan payments.

Of course, everyone's situation is unique, so it's important you consult your financial advisor for specific information if you are considering leverage strategy. Reach out to us today to speak with a BlueShore Financial advisor about leveraging the equity in your home.