2016 was a benchmark year according to the Vancouver Real Estate Board. Many property owners, myself included, were shocked when they opened their BC Assessment notice. In fact, I nearly spit out my coffee it was so high—and I am someone who assesses property values on a daily basis.
In rudimentary terms, if you bought a property a year ago or prior, you will most likely be sitting on a rather large equity nest egg. Yet for a lot of homeowners, equity is an underestimated and misunderstood subject.
Basic home equity is the amount of money you would have if you sold your home, minus the mortgage.
As an example, if you bought a $500,000 home in 2015 with a 10% down payment of $50,000 and a mortgage of $450,000, that same home would now sell for $600,000. Take your current market value of $600,000 minus the mortgage of $450,000 and that’s basic equity of $150,000. In this example the initial down payment was $50,000, which makes the total market gain equity $100,000, plus your initial equity of $50,000. If you actually sold your home there would, of course, be closing costs to pay out as well.
When people speak of leveraging equity they are generally talking about holding on to an asset and making use of the capital it has accrued through a capital or equity loan. In this example, the asset is your primary residence and the capital is the market increase, plus your initial investment. Sometimes this is called an “equity take out” as a secured loan against your home.
Perhaps you want to invest in real estate and become a landlord? This would be a great time to leverage the equity in your primary residence! Most lenders will require you to leave 20% capital in your current asset but the rest can be leveraged. In this scenario you could be putting the market gain to work for you, by layering on a loan for an investment or vacation property–or keep the first property as an investment and leverage the equity to buy your next residence.
Either way, if the market keeps moving up you’ll have options for equity leverage right in your own backyard!