If you’re 55 or older, it’s likely that you’ve spent years building up equity in your home. It’s quite possibly the main source of your net worth, as it is for most Canadians.

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All the time, effort and dutiful repayments you’ve put in, only for it to be tied up and locked away. At this age, that kind of cash could be life-changing.

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We’ve got potentially life-changing news, in that case. There are ways you can access your home equity –  and most of them don’t even involve selling your house.

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We explain everything you need to know about taking equity out of your home below.

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What is home equity?

Your home equity is how much of your home’s value you own. That’s the current market value of your home, minus the debts you have secured against it.

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To put it into numbers, if your home is valued at $500,000 and you owe $50,000 on your mortgage and $50,000 on a Home Equity Line of Credit, your home equity is $400,000.

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Home equity is unrealized – you can’t access it as cash here and now. To realize that value, you can sell your home or use a few other options.

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How borrowing against home equity works

Instead of selling your home, you can unlock your home equity through a loan.

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By using your home as collateral for a loan, you can essentially get an advance on your home equity.

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As with any asset you secure against a loan, you risk repossession or foreclosure if you can’t keep up your repayments.

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Six ways to get equity out of your home

There is more than one way to get your equity out of your home, with enough approaches to suit almost every homeowner and property.

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You should always do your own research and consult with a financial advisor before making any decision about accessing your home equity.

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Home equity loans

With a home equity loan, you borrow a sum of money and the loan is secured against the equity you have in your home.

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A home equity loan doesn’t reduce your ownership or equity – you’re not selling your house back to the bank. Instead, you’re borrowing the money with the promise that, if you can’t repay, the lender can use your home equity to get their money back.

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Home Equity Line of Credit (HELOC)

A HELOC is the same concept as a home equity loan, but delivered in a different format.

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Rather than paying you a lump sum at the start of the loan, a HELOC is a revolving credit facility. That means you can dip into it as you need, within the draw period you agree with your lender. You can think of it along the same lines as an overdraft or credit card.

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We’ve written a comprehensive guide to HELOCs, if you want to learn more.

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Cash-out refinancing

A cash-out refinance is a way to take out a new, bigger mortgage on your property. The refinance pays off (and replaces) your existing mortgage and pays you the difference in cash.

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Say your home is valued at $500,000 and you owe $100,000 on your current mortgage. You could arrange a cash-out refinance for $150,000 – taking $50,000 in cash and repaying your current mortgage with the remainder. Your current mortgage would close and your new cash-out refinance mortgage would replace it.

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This would reduce your equity and increase your repayments, so you’ll need to work out the costs against the benefits.

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Reverse mortgages

A reverse mortgage, like we offer at Bloom, is a way to access your home equity immediately without sacrificing any of it.

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You can take out up to 55% of your home’s value as a cash payment, with the debt only repayable when you leave your home. You’ll never repay more than the fair market value of your property at the time your repayment is due, so there’s no risk of negative equity or a large debt leftover.

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Learn more about Bloom’s reverse mortgages.

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Selling your home

This is the most straightforward, but not always easy, option: you can sell your house and access all the equity you’ve built up.

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Of course, you still need somewhere to live – whether that’s renting or buying somewhere new. Either option will use up some, if not all, of your newfound cash.

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Dividing your property

Depending on the type of property you own, you could access some equity by repurposing your house or other buildings.

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In a large enough property, you could split it into a duplex. If you have outbuildings or barns, you can convert them into residences. 

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There are a lot of costs, time and paperwork involved in this process, but the eventual payout could release the equity you’ve accrued in and added to your home.

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Potential risks of taking equity from your home

If you’re thinking about taking a loan and using your home as collateral, there are some risks you need to consider.

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Increased debt load

The most obvious issue is that you’ll be increasing your debts. Without wanting to patronize anyone: those debts need repaying.

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You (and your lender) have to be sure that you can afford the repayments over the lifetime of the loan, otherwise you risk defaulting and facing the ugly consequences.

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Risk of foreclosure

Talking about the consequences of not repaying a loan, foreclosure is the main risk with loans secured against your home. The whole point of a secured loan is that your lender can take your home from you and sell it to get the money they’re owed. Depending on your loan, your lender will have the right to foreclose on your loan or repossess your property.

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If your lender forecloses, they’ll enter a legal process to take control of your home and sell it – first, repaying their debt and then leaving you with whatever remains.

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If a lender repossesses, they’ll take ownership of your house, sell it and keep the profits and rights that are left after the sale.

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Interest rate fluctuations

You need to be able to afford repayments at higher interest rates than those you start the loan with. 

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This is just as true if your loan uses a variable rate or a fixed rate. A variable rate can change from month to month, which is harder to manage, but a fixed rate will eventually expire and you’ll need a new one.

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If interest rates have changed a lot while your loan was fixed, you could end up with higher repayments – even when you’ve made inroads into repaying your debt.

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Fees and closing costs

Borrowing money is expensive for a lot of reasons, not just because of the debt you take on.

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Every type of loan mentioned in this article will come with fees and closing costs that you’ll need to pay upfront. Some lenders might let you include some of their fees in your loan balance, but don’t count on this being an option.

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You’ll need to have the cash ready to pay for what you borrow.

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Negative equity scenarios

If the value of your property goes down at the time you need to sell it, it’s possible that you could end up with negative equity. In other words, the money you get from selling your house won’t be enough to repay the rest of your loan.

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You’ll still be liable to pay off your remaining loan balance, but the proceeds from selling your house won’t cover it. Negative equity can also make it hard to buy a new home.

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A Bloom reverse mortgage is an exception to the rule, as every loan is protected by our Home Equity Guarantee.

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Steps to take equity out of your home

We can’t tell you the steps of applying for specific loans from specific lenders, but we can tell you how to prepare in the best way possible.

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1) Assess your home equity

You can arrange a formal valuation with a realtor or make an educated estimate yourself, by doing desk research into recent sales prices in your area.

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2) Choose the right equity extraction method

Decide which of the options we’ve shared is right for you. You’re not making a commitment at this stage, you’re just narrowing your focus to get a better understanding of your options.

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3) Check your credit score

Before you go ahead with any application, first check your credit score. You’ll want to know that your credit score meets the minimum requirement for lenders, otherwise you’ll fall at the first hurdle.

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Canadians can check their credit score for free using Equifax and TransUnion (they call it a Consumer Disclosure).

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4) Gather necessary documentation

Prepare for paperwork! Any finance agreement is going to eat up some of your time with administrative tasks and getting equity out of your home is no different.

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You’ll need to have:

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• All the paperwork associated with your mortgage, if you still have one.
• Proof of your income(s) for affordability testing.
• Evidence of all other loans you have.
• Proof of ownership or equity.

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5) Get independent advice

A trustworthy financial advisor can really help with the process of extracting equity from your home, as they can look at your situation with professional neutrality.

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They won’t be afraid to say if something looks wrong or if they think you’re making a bad choice.

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6) Shop for lenders

There are lots of options for borrowing money against your home equity, so you’ll need to do some research. Taking the time to shop around will mean you can find the best deal for you – that could be the lender who offers the longest term or the lowest interest rates. You won’t know what’s out there unless you explore the market.

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7) Apply for your chosen equity extraction method

Once you’re happy with your choices, the only thing left to do is make your application.

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Your lender will have their own process for you to follow, but most can accept applications online, by post, in-person or over the phone.

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You can unlock more of your net worth

For most Canadian seniors, the majority of their wealth is tied up in their home. Making that equity accessible is the big challenge of later life.

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We’ve shared six great options for releasing equity from your home in this article and there are even more out there, too. Even if none of these six are right for you, we hope you feel more confident that it’s possible, affordable and reasonable to access your equity now.

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If a reverse mortgage stands out as the option for you, then go ahead and try our reverse mortgage calculator. You can get a free, no-obligation quote for a reverse mortgage in just a few clicks.

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