In simplified terms, equity is the difference between the portion of your home that the bank owns (your mortgage) and that you own. If you were to sell your home today, and pay off any mortgages or home equity loans/lines of credit, what would be left? That’s equity. That means there are two primary ways you can have more equity. The first is perhaps a bit more obvious or straightforward. It’s to pay down your mortgage. The second is to increase the value of your home. Some of this work is simply done by time. The longer you stay put in your home, the more likely the value of that property will go up. Yes, there have been occasional market dips in Canada, such as during a recession, but for the most part, the trajectory of property values is always upward.
Let’s start with some of the ways you can come up with money to pay down your mortgage. I hope you’ve worked with a mortgage agent who has helped you build some flexibility into this loan. Prepayment terms can definitely work in your favour. If you have the opportunity to make a lump-sum payment each year on the anniversary of your mortgage, try to do it. Even if it is only a few hundred dollars that you are able to eke out of your budget, this will make a big difference in the long run. In the early years of owning a home, most of your mortgage payment goes to cover the interest (banks and other lenders like to get their money up front). That means reducing the principal early on, can save years and thousands of dollars of payments for you.
Next, keep an eye on interest rates. At the moment they are climbing, but at some point, what goes up must come down. When you reach a point where mortgage rates are declining and your mortgage is up for renewal, there are two ways you can take advantage of this situation. The first is to keep the same blended payment with your lender – a greater proportion of that payment will go toward the principal. Hello, equity! The other option is to let the payment decline with the rate, but to keep paying the extra money into a savings account, and to use it to make a lump sum payment on the anniversary date. You’re already used to making that payment every month. It’s baked into your budget. So, although an extra dinner out might be nice, wouldn’t you rather own your home outright, sooner? Most of us would.
When you are working with your lender to figure out the right type of mortgage for you, remember that rate isn’t the only important factor. Frequency of payments can make a difference as well. If you opt for accelerated payments (rather than simply paying monthly), you can end up reducing the duration of your mortgage quite significantly. This means more equity for you, sooner.
Those are a few ways to come up with extra cash just by how you’re approaching your mortgage – but everything is expensive these days. How can you save extra money to make those lump sum payments? If you’ve managed to accumulate a down payment, I know that you’ve already got some saving skills in your toolbelt. Did you have a set budget? If not, that’s the place to start. Take a month and track your spending. All of it. Every cent. Every tap of the debit and credit cards. Look at it all. Even for experienced budgeters, this can be a sobering experience. Discovering just how much we are spending on entertainment, alcohol, new shoes, or other items that are “just part of normal life” can help everyone find where there are opportunities to trim and save a bit more toward that anniversary payment.
Lastly, even if you weren’t privileged enough to have the “Bank of Mom and Dad” to help you with your down payment, most of us have some friends or family who give us gifts for special occasions. Tell those people that you’ve set a goal to pay off your mortgage sooner. Let them know that you will be just as happy with cash that you can save toward your anniversary payment, as with the gift they had been planning to buy for you. Bonus marks if they live far away, as they won’t have the postage costs of mailing or shipping a gift.
Those are some ideas for the mortgage side of the ledger. Keep on working to get that paid down sooner, so that more of your home belongs to you. What about increasing the value?
The first thing I hope you did, was to research neighbourhoods with your real estate agent when you first bought your home. If you have options (sometimes, they will be limited when you start out), choose the neighbourhood where prices are escalating more quickly. This means your home will increase in value, just by being there. Think of it as making money in your sleep. In a big city like Toronto, prices are going up quickly. And in certain smaller cities, home prices are outpacing nearby communities. A great place to read about this are articles such as MoneySense’s annual reports on best places to buy real estate. Expect a new version of this report by mid-year.
Secondly, while we’ve all seen those flip-for-a-fortune shows on television, the truth is, fixer-uppers can be a double-edged sword. It’s important to look at a property with a healthy sense of your own fixing skills. If you buy a home that needs a ton of work, but you’re not able to do that work, you’re going to have to pay someone else to do it. That will eat into your profits if you’re an investor, or, in the case we’re considering, your equity. As long as the gain in equity is a net positive, that’s fine. But if you actually end up further behind by the time all is said and done, it’s a false economy.
This month is the month when people traditionally do work in their gardens, if they have townhomes or houses. Putting some sweat equity into gardens, lawn care, and general outside maintenance can really pay off. Curb appeal isn’t just for buyers – making your property make a great first impression can also benefit you greatly when the time comes for you to sell. And making sure your home is up to neighbourhood standards will ensure its value keeps pace with the other homes around you. What if you live in a condo? Get involved with the garden club, and also with the Board, if you can. Then you’ll have more say in what improvements are being made to the building – making it more attractive. When prices go up in your building, every owner benefits.
Inside, basic maintenance and upgrades will always contribute positively to your equity. Letting things get worn out or run-down will likely lead to costly problems. Think about which you would rather do: repair that leaky faucet, or replace the whole countertop and cabinet when the leak causes rot underneath. I think you know the right answer.
Speaking of leaky faucets, two areas where your money goes a long way, in terms of building equity, are kitchens and bathrooms. If you have a house or townhome with a single bathroom, adding a second one, or even a powder room, will be a real equity-builder. And although fancy custom kitchens can cost tens of thousands of dollars, many big box stores offer refacing services that can take a solid but boring kitchen, and make it look as fresh as those in a brand-new home. Similarly with the bathroom. Sometimes simply putting in a new vanity, changing the taps for a more modern one, or re-tiling, can help you enjoy your home more now, and add to the value you’ll receive when you do decide to sell it.
To summarize, these are 10 ways you can build equity:
- Make lump sum prepayments, even small ones
- Take advantage of interest rate drops to gain equity
- Pay more frequently
- Do a budget review to find more mortgage money
- Ask for mortgage money instead of gifts from those who give to you
- Buy in a neighbourhood with rising home values
- Only buy a fixer upper if you can come out ahead on the cost of fix-ups
- Build curb appeal by investing time and efforts on lawns and gardens
- Keep on top of basic maintenance
- Update kitchens and bathrooms wisely
Have you thought of some more already? I know I have! If you’ve already built a lot of equity and are thinking you’d like to upsize, get in touch today. I’d love to help. And if you’re lucky enough like me to have 100% equity in your home, and you’d like to downsize for retirement or just to use your hard-earned equity somewhere else, I’d be glad to hear from you as well.