While levels can vary depending on several different factors (including changes in the property value and/or the balance of a mortgage). every homeowner receives equity on their property. When purchasing a new preconstruction unit, equity from a previously-owned property can be very useful when financing the new acquisition. The first step when leveraging your home equity is to calculate the fair market value, or FMV, of a property. Here’s an example:
Let’s say you buy a house for $300,000. You’ve paid off $100,000 of your mortgage, but due to a rise in property values in your neighborhood your house is now worth double what you paid for it. Thus, your FMV is now $600,000. Equity is then calculated by subtracting the remaining amount of the mortgage (in this case $200,000) from the total FMV, so the total equity for this property would be $400,000.
Leveraging that Equity
When buying a new property, lenders will allow you to use part of that equity to fund the purchase of a new home. This process is known as leveraging, and can be used for up to 80% of the home equity amount. For example, of the $400,000 from the property above, $320,000 of it could be used to buy a new condo or house. To use this form of leverage, simply go to your bank and request a Home Equity Line of Credit (HELOC) loan. The HELOC loan, which normally carries an interest rate of #%, can then be used to buy a property for a primary residence or as an investment property. In the case of the latter, the Canada Revenue Agency allows the interest to be deducted on your taxes.
For more information on buying preconstruction units, check out some of our other articles:
- Home Buyer Guide & Tips