What Is Equity & How To Use It?

I mentioned in my last post that to buy my second home, I leveraged the equity I had in my first one. For those who are new to real estate or aspiring to “climb the property ladder”, I consider equity to be a not-so-secret weapon that you may not understand until the right opportunity passes you by. Here’s what it is:

A simple definition is that home equity is the difference in your property’s value versus what you owe, such as an outstanding mortgage. For example, if your property is worth $300,000 and your mortgage is just $100,000, you should have $200,000 in equity. This is why you may hear people speak in favour of putting down a larger downpayment so that they will have a lower overall mortgage amount - this puts you in a position to go into owning the property with higher equity upfront. 

So what’s the benefit of having a large amount of equity? It’s not just that you can pay off your mortgage sooner and own your property outright quicker - although that is certainly something to aspire for as soon as possible. A large amount of equity allows for more opportunities to get a home equity loan. These loans allow you to use the equity you have in a property to make other purchases or take out alternative loans. For example, rather than putting down cash as a downpayment on a second property, you can use the equity in your existing property. There may even be opportunities to take out a loan against the property for other purposes, such as auto, academic or home improvement loans. 

The benefit is obviously that you don’t have to come up with a large amount of cash to finance other opportunities. However, the downside is that if you do fail to make the required repayments, you may risk the bank repossessing both properties or other assets. 

Like any real estate decision or investment, home equity loans are not one size fits all. There are several factors you may want to consider within your personal situation that will help you to weigh up the pros and cons.