Karen Explains Mortgages | Equity & Business Owners
For the last several years, many BC homeowners watched the equity in their homes grow substantially. But real estate doesn't move in one direction forever. As we are witness to BC home prices falling along with their appraised values. Appraisals are related to recent sales so even if your BC assessment was strong, current value will likely be lower on appraisal.
In a softer housing market, property values continue to decline—and that matters if you're a business owner who may eventually want to access home equity.
Here's why.
Your Equity Isn't Based on What Your Home Was Worth Two Years Ago
When refinancing, lenders look at your property's current appraised value.
Let's use a simple example. If your home was worth $1,500,000 and your mortgage was $700,000, you had approximately $800,000 in gross equity. If the property's value later falls to $1,350,000, that equity has dropped to approximately $650,000. You haven't done anything wrong. You haven't borrowed another dollar. But your available lending room may have changed.
This is the reason I believe business owners should understand their equity position before they actually need the money.
Why Would a Business Owner Access Home Equity?
Not necessarily because they're in financial trouble. Quite often, it's the opposite. I work with business owners who are considering equity for things such as: business expansion, equipment, purchasing a commercial property, buying out a partner, investing, consolidating higher-interest debt or creating additional liquidity. Sometimes home equity can provide access to capital at a considerably different cost than other forms of borrowing. But that doesn't automatically make it the right decision.
The question should always be: What is the money being used for, what will it cost, and what does it accomplish?
Don't Wait Until Cash Flow Is Tight
This is one of the most important lessons I can give a business owner. The best time to investigate financing is usually before you desperately need financing. When you plan early, you may have more choices. When you wait until there is a cash-flow problem, CRA balance, credit deterioration or urgent business expense, the number of available lenders can shrink quickly.
Know Your Number
You don't necessarily need to refinance today. But if a significant portion of your net worth is sitting in your home, I think you should understand three numbers:
What is my home realistically worth today?
How much equity do I have?
How much could I potentially access if I needed it?
Knowledge gives you options. And for a business owner, options can be extremely valuable.
If you haven't reviewed your mortgage and equity position recently, let's do it before you need the money. Sometimes the best mortgage strategy is simply knowing what is available.