A growing number of homeowners—particularly in Canada’s urban centres—are finding themselves in the unexpected situation of being millionaires, at least on paper. In the City of Toronto and Greater Vancouver Area, for example, the average price of a detached home rang in at $1.51 million and $1.49 million, respectively, this August.
But while homeowners in these cities and others are becoming “house rich” and possibly even joining the millionaire’s club, it doesn’t mean they suddenly have a whack of money to spend. On the contrary, they may have prioritized paying off the mortgage over long-term savings and investments, leaving them cash poor.
“There are so many costs associated with living in a major city and owning a property that there might not be a lot of money left over to max out your RRSPs or TFSAs,” says Jackie Porter, a Mississauga, Ont.-based CFP and financial advisor serving professionals, businesses and families with cash flow management and tax planning.
Problem is, if you face a job loss or emergency expense; you retire without adequate pension income; or you just want to unlock some of the wealth tied up in your property, it can be challenging to access that cash. “It’s not money you can get at without jumping through a lot of hoops,” she says.
How to access the equity in your home
There are four basic ways homeowners can tap into the cash locked-in to their properties:
Downsize, sell or rent out your home
Selling or renting out your property will obviously give you some much-needed cash, but you still need to live somewhere. Unless you’re prepared to move to a location where properties and/or rents are significantly cheaper, you might not come out that far ahead—especially after real estate fees, land transfer taxes (if buying another property) and moving costs.
Refinance your mortgage or take out a new one. Interest rates are at historic lows, so you may be able to borrow additional money on your mortgage (or take out a second one) and get a one-time cash payment at rock-bottom rates. Of course, you’ll not only have to pay the money back according to the lender’s amortization schedule, you’ll also have to qualify under the government’s rigorous mortgage stress test and/or new eligibility rules for mortgage insurance. If you have too much debt or your income isn’t high enough, you could be out of luck.
Take out a home equity line of credit (HELOC)
A HELOC allows you to borrow money on an as-needed basis (up to a set amount that you negotiate with your lender); you’re required to pay monthly interest only on the amount you’ve borrowed (although you can pay more if you wish). Rates are lower than for other lines of credit because the loan is secured by your property and, unlike a mortgage, there is no schedule of payments on the principal. You pay off the loan when it’s convenient for you—but you must make your interest payments on time, or you can risk losing your home depending how large the loan is.