Borrowing against your home

Make sure you know about all the costs along with the advantages and disadvantages of borrowing against the value of your home. You can get a home equity loan or a line of credit if you’ve paid off some of your mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition. If you’re over age 55, you’re also eligible to apply for a reverse mortgage.

5 advantages of borrowing against your home

  1. Frees up cash – InvestInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition the money, buy an annuity to create monthly income or use it to cover expenses.
  2. Keeps cost of borrowing low – Interest rates on home equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition loans and lines of credit are lower than for other kinds of loans.
  3. Creates tax breakTax break A credit or deduction that lowers the tax you owe. Governments often offer tax breaks to help people save, go to school or pay costs such as child care.+ read full definition You can deduct the interest on the loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition from your taxes if you invest the money you borrow (this taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition break can balance out any tax you may pay on unshelteredUnsheltered A regular investment or account that does not shelter your money from tax. In other words, you have to pay tax on your savings and the money you make investing them.+ read full definition investments).
  4. Allows you to stay in your home – Continue to live in a home you love in an area you like.
  5. Keeps equity – You have ownership in an assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition that may go up in value and add to your estateEstate The total sum of money and property you leave behind when you die.+ read full definition.

The best strategy is to find ways to cut your expenses, so that you can avoid borrowing in the first place.

5 disadvantages of borrowing against your home

  1. Requires monthly payments – The minimum monthly payment may not be large enough to pay back any of your principalPrincipal The total amount of money that you invest, or the total amount of money you owe on a debt.+ read full definition. You may only be paying the interest.
  2. Does not eliminate costs – You still have to pay property taxes, maintenance costs and home insuranceHome insurance Insurance that covers your home and its contents against losses. Also covers you for accidents that may happen at your home.+ read full definition.
  3. Adds costs – To get the loan, you may have to pay appraisalAppraisal An evaluation of what your home or other property is worth today. Most often done by someone who is an expert or is certified by an organization or the government. The Appraisal Institute of Canada is one organization that designates individuals.+ read full definition fees, application fees and legal fees.
  4. Increased cost of borrowing – If you have a variable rate loan or line of creditLine of credit An account that you set up with a financial institution (often a bank) to borrow money. It lets you borrow what you need, when you need it, up to a certain limit.+ read full definition, your interest cost will increase if interest rates go up.
  5. Creates tax cost – You may have to pay tax on any unsheltered investments you make using the money you borrowed.

Home equity lines of credit

As of 2011, you can no longer get government-backed mortgage insuranceMortgage insurance Insurance you get to cover your mortgage payments in case you get sick, hurt, or die.+ read full definition on most lines of credit secured by your home. As with credit cards, you make minimum monthly payments on the amount you borrow. You do not have to pay off the full balance each month. But in many cases, the interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition is not fixed. So, if interest rates rise, your minimum paymentMinimum payment The minimum amount that you must pay, usually monthly, on a loan or line of credit. In some cases, the minimum payment may be “interest only.” In other cases, the minimum payment may include principal and interest.+ read full definition will go up. If you can’t make your payment, you won’t be covered.

Most home equity loans are used to consolidate other debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition or to spend on something other than housing. The new government rules aim to discourage Canadians from taking on too much debt.

Take action

Find ways to cut your expenses, so that you can avoid borrowing in the first place.

Fast facts

A 2011 industry survey shows that 10% of mortgage borrowers took equity out of their home in the past year. The average amount was estimated at $49,000. The total borrowed added up to about $28.5 billion.

Source: Canadian Association of Accredited Mortgage Professionals

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