A sellers’ market puts homeowners in the drivers’ seat. When inventory is low, buyers compete for the limited homes on the market, pushing prices upwards. Sellers’ markets make it easier to sell your home fast and at a premium. However, many homeowners are unaware they can leverage a sellers’ market beyond simply putting their home on the market. Here we look at four ways homeowners should be leveraging Toronto’s sellers’ market.
Leveraging Home Equity
Home equity is the simplest and most wonderful aspect of home ownership. The beauty of home equity is that from the moment you purchase your home, you already have equity. Home equity is the current appraised value of your home minus what you owe on your mortgage. The longer you’ve owned your home, the higher your down payment, and the more you’ve paid down on your mortgage, the more home equity you have. Although in rare cases your home equity might suffer because you overpaid for your home, for most homeowners equity increases year over year. Here’s how you can leverage home equity without selling:
Know Your Home’s Value
In a sellers’ market, home prices rise, which means your home equity also rises. In August home prices in Toronto ranged from $720,832 for a condo apartment to $1,674,641 for a detached house. So even if you bought your home in August 2020, you’re already seeing a possible increase in value between 9.4% and 21.4%. It all depends on the type of home you purchased and how much you paid. You can calculate your home value based on what you paid, minus what you owe, but your home value has more than likely risen. So the easiest thing to do is look at homes for sale in your area to get a better idea of its current value.
Consider Your Options
Once you get a good understanding of how much equity you have in your home, you can decide if you could use that money by acquiring a home equity loan. A home equity loan provides access to your home equity now without the need to sell. Your options include:
- Refinancing your home or arranging a second mortgage to access up to 80% of your home’s appraised value
- Home equity line of credit (HELOC) to access between 65% to 80% of your home’s appraised value
- Reverse Mortgage to access up to 55% of your home’s appraised value
- Borrowing prepaid amounts of your home equity as you need it
You can discuss home equity loans with your lender to find out which solution best meets your needs.
Decide If You Need the Money
Pursuing a home equity loan only makes sense if you have a plan to put the money to good use such as:
- Emergency Funds: You never know when you might have a financial emergency whether it is a lost job, your car dies, or your home needs emergency repairs.
- Consolidating Debt: If you owe money to several lenders and credit cards, the interest alone can kill you. As long as you’ve maintained a good credit score, you can use your home equity for loan consolidation. The loan pays off all your debt, and then you just have one monthly payment, at a lower interest rate. As a result, you can pay debt down sooner, while having more cash available.
- Home Renovations: If you feel your home needs renovations to make it forever home worthy, you can access your home equity to cover the costs. This works as a two-way strategy as you’ll also help increase the value of your home in case you do decide to sell.
You might also have something else in mind such as setting up a RESP for your kids, a trip, investments, or starting your own business. The trick is to weigh the pros and cons of using home equity now, or allowing it to grow.
Investment Property to Increase Income
You can also leverage your home equity to invest in another property. You can decide to rent out your current home for investment income and purchase a new primary home, or stay in your current home and purchase an investment property such as a condo. To acquire an investment property using home equity, you’ll need a 20% down payment regardless of the price of the home. Although you’re accessing your own equity, lenders will still expect you to meet their lending criteria. This is an excellent option if you’re looking to grow your income. Your home equity provides the down payment needed, and your tenants pay down your mortgage through rent. You just have to decide if being a landlord suits your lifestyle!
Downsizing to Grow Wealth
Downsizing can be tricky in a sellers’ market as inventory is low and prices are high. So first you have to determine if you have enough equity in your home to make the transition worthwhile. You only want to downsize if you can a) Either pay cash for your new home or greatly reduce your mortgage payments and b) It suits your lifestyle. To downsize you want to first have your current home appraised, something we can do for you. This will tell you how much you can expect to get for your home. Next, you want to look at your home equity. The more home equity you have in your home, the better chance there is you can pay cash and not have a mortgage. Alternately, you can have a higher down payment to reap the benefits of reduced mortgage payments. If you do need a mortgage, you can also choose to use the money you saved from your old mortgage, to pay more towards your new mortgage each month. This allows you to be mortgage free faster. You then live mortgage free and enjoy increased cash flow for life.
Relocate to a More Affordable Location
Much like the downsizing scenario, you can use your home equity to purchase your dream home in a more affordable area. Home ownership in Toronto can be quite expensive compared to areas in any of the charming towns in Ontario. If you aren’t tied to your life in the city, you might consider looking for a home in a smaller town, where you’ll find plenty of home for a far more affordable price. If you’re one of the many Torontonians now working from home, you can live anywhere your heart desires. With housing prices so high in the city, you can make a nice profit when you sell. You can use that money for a generous down payment, or if you’re lucky pay cash for your rural home. Relocation can offer you a quiet life living off the profits of your sale.
The point here, is that homeowners have choices during a sellers’ market. You can use your home equity to improve your life, make smart investments, or plan a strategic move designed to improve your quality of life.
If you’d like to learn more about leveraging your home ownership, we can help find the most profitable solution. Whether it is smart home renos to increase home value, figuring out your home’s worth, or understanding your options for a wise move, we’re here to offer advice that helps you meet your goals.