Recently, the Bank of Canada’s policy interest rate, also known as the overnight rate, has increased another 0.5%. This means that the Prime Rate of Canada has also increased, affecting credit cards, HELOCs, variable-rate mortgages, and auto loans. Most financial institutions would say that increases are not over, as the overnight rate is reviewed 8 times a year, and we are slowly moving out of a pandemic level economy. If you have a mortgage nearing the end of its mortgage term, now is the best time to leverage the increased equity produced by the increasing value of homes in Canada. You could also lock in an interest rate before it continues to increase.
How does the increase in the value of my home affect my home’s equity?
When we calculate the equity of a home, we compare the house’s value at the time of the mortgage against how much left you owe on your mortgage. For example, if your home were valued at $250,000 at the time of purchase and paid $150,000 on your mortgage, your home’s equity would be $100,000. Your home equity can increase in two ways:
- As you pay down your mortgage.
- If the value of your home increases.
Statistics from the National Housing Price map provided by the Canadian Real Estate Association, homes all over Canada have seen an increase in value of about 11.2% from March 2021 to March 2022. This means that if the value of your home increases, then you get that additional increase in value towards the total equity of your home.
In Alberta, the average home value has gone up 7.14% over the last year. This would help increase the overall value of equity that you can access when refinancing your mortgage. It could also go the other way, where your home’s value could decrease and provide less in equity. That’s a big reason why NOW is a good time to refinance your mortgage.
Let’s say your $250,000 home had an increase of 7.14%, which would mean that your home is now valued at $267,850. That’s an additional $17,850 in equity!
Refinancing your mortgage rate can help you lock in your interest rate AND leverage your home’s equity increase.
When you refinance your mortgage, you can access a few different benefits that could help with debts or that renovation you’ve always wanted on your home. You can lock in a fixed interest rate on a fixed-rate mortgage so that you don’t have to worry about increasing interest rates until your term ends. Another great benefit of refinancing your mortgage is that you can get access to up to 80% of your home’s equity. If the value of your home has increased, so does the discount of that 80% of equity. With that 80% of equity, you can use it towards:
- Paying High-Interest Debts
- Consolidate Loans
- Use the money towards renovations or upgrades to your home.
That being said, variable rates are still an excellent choice for some situations. If you want to lock in a rate that makes you feel secure, that’s ok. Whether it’s a variable or a fixed rate, you still have the potential to access up to 80% of home equity when you refinance your mortgage. Our advice is that every circumstance is different and that it is best to speak to one of our mortgage professionals to see all of your available options.