Your Home Equity: A Guide to Calculating, Building, and Accessing It
Home equity has become a significant asset for many Canadians. Our analysis has found that home equity represents between half and two-thirds of the median homeowner’s net worth in Canada. But unlike traditional financial assets like stocks and bonds, your home equity doesn’t appear in an account or on a bank statement. Even though you can’t pull it out of an ATM, your home equity is a valuable asset that can be used to achieve your financial goals. In this post, we break down how to calculate your home equity, how to build it, and how to access it.
What is home equity?
Home equity is the market value of your stake in your home. To calculate your equity, you must subtract all “secured” amounts from your home’s market value. A secured amount is any financial claim formally registered against your home’s title, which represents a legal stake in your property’s value. For example, if your home is worth $1,000,000 and you owe $600,000 on a mortgage loan, then your home equity is $400,000.
Secured amounts can be categorized as follows:
- Debts: These are loans that use your home as collateral, most commonly a mortgage loan or a home equity line of credit (HELOC).
- Other obligations: These include non-debt obligations registered against your home, such as a lien (which can be placed for unpaid property taxes or construction costs) or a home equity sharing agreement, which is a financial contract.
To find the value of your equity, you must subtract the value of all of these registered claims from your home’s market value.
Conversely, unsecured debts are not subtracted when calculating home equity. These are personal debts not tied to your house, including most credit cards, student loans and personal lines of credit. A car loan, while “secured”, is secured by the vehicle and therefore does not affect your home equity.
Why is home equity so important?
Home equity has become an increasingly important wealth-building tool for Canadians, driven by rising real estate values across Canada over the last decade. One of the key advantages of home equity is the tax-advantaged gains that come from owning a principal residence, with profits from the sale of a principal residence often exempt from capital gains tax.1
With the Canadian Real Estate Association’s national benchmark home price rising from $441,700 in September 2015 to $682,600 in September 2025, Canadians’ homes have appreciated over 50% in the last decade.2 With all of this wealth trapped in their homes, more Canadian homeowners than ever before are looking for ways to access their home equity to meet their financial goals and fund major expenses.
How do you build your home equity?
Your home equity increases when the value of your home appreciates or you reduce the amount secured against your home.
1. Your home appreciates
The value of your home equity grows as the fair market value of your home appreciates. If your home appreciates a lot, your equity will increase significantly but, if your home appreciates a little, the increase will be more modest. The fair market value of your home could also fall in a market downturn, which would cause the value of your equity to decrease. These changes in value are largely a function of market conditions that are outside of your control.
How it works: Suppose your $1,000,000 home appreciates by $150,000 over a 5 year period, raising its overall value to $1,150,000. Even if your mortgage balance remained unchanged at $600,000 over those yours, your home equity will have grown by $150,000, increasing from $400,000 to $550,000.
2. You pay off secured amounts
When you make payments on a secured debt, such as a mortgage loan, a portion goes toward reducing the principal balance (i.e., the amount you originally borrowed). Paying down principal directly increases your home equity.
Another portion of your payment goes toward paying interest on what you borrowed. Interest payments do not affect your home equity. However, if you do not make an interest payment or have a no-payment loan where unpaid interest is added to your principal balance, this would decrease your home equity.
How it works: Let’s say your home is worth $1,000,000 and you owe $600,000 on your mortgage. That means you already have $400,000 in equity. If your monthly mortgage payment is $3,000 then, at this stage of your mortgage, $2,000 may go toward the repayment of principal with $1,000 going toward interest payment. In this scenario, your equity increases by $2,000 with that payment. After 5 years, your home equity will have grown by $120,000 as a result of principal repayments, even if your home’s fair market value has stayed flat.
Every principal payment you make adds directly to your equity, steadily growing your equity stake in your home. Keep in mind that the portion of your payment allocated to principal and interest changes over the life of the mortgage. Early on, more of your payment typically goes toward interest but, as you reduce your mortgage balance and the amortization period shortens, the share going to principal gradually increases, steadily growing your equity.
The same principle applies to paying off non-debt amounts secured against your home, like a lien or home equity sharing agreement. Reducing these non-debt claims on the value of your home generates a corresponding increase in your home equity.
How do you access your home equity?
Previously, Canadian homeowners had two options for accessing their home equity: sell their home or take on secured debt. These options can be helpful solutions for some homeowners. For others who want to stay in their homes but do not want to take on more debt, Clay Financial’s Home Equity Sharing Agreement (HESA) is a new alternative for accessing their home equity.
1. Sell your home
Selling your home provides the opportunity to unlock the full value of your home equity. However, this approach is not without its challenges. The process involves substantial costs, including realtor commissions, legal fees and potential mortgage prepayment penalties. Additionally, selling necessitates securing alternative housing. In order to actually free up your home equity, you’ll need to downsize or switch to renting – otherwise you’re simply moving your home equity from one property to another.
2. Take on secured debt
Traditionally, the only way to access your home equity without selling was to take on secured debt. Most commonly, this was done through debt products such as HELOCs, home equity loans (i.e., second mortgage loans), cash-out refinancings of first mortgage loans, reverse mortgages and no-payment mortgages. These options allow you to access some of your home’s value without having to sell it. Each approach provides a way to unlock equity from your property while allowing you to remain in your home. However, it’s important to consider the associated costs, repayment terms, and potential impact on your long-term equity when deciding which option is right for you. Some products require monthly interest payments while others have interest compounding in the background until the end of the loan.
3. A new alternative: Get a HESA
A Home Equity Sharing Agreement, or HESA, is a new financial contract that allows homeowners to access a portion of their home equity without taking on debt or making monthly payments. It provides you with a lump-sum payment today and, in exchange, you’ll make a payment at the end of HESA based on how much your home has appreciated since the beginning of the contract. The HESA has a flexible term, ending when you sell your home, choose to buy out the agreement, pass away or after 25 years if it hasn’t ended for any other reason. It carries no age restrictions and preserves your existing equity, as it shares in the future appreciation of your home.
If you have sufficient equity, a HESA can co-exist with existing debt products like a mortgage and HELOC for added flexibility. A HESA offers an attractive alternative to traditional debt, as your payment is tied to your home’s future value, not interest rates and fixed terms. This flexibility makes it especially appealing in times of uncertainty around home prices and interest rates.
Your home equity can unlock financial flexibility
Home equity is more than just a number. If you’re a Canadian homeowner, it’s likely one of your most important assets. Your home equity represents an opportunity, even if you aren’t interested in the hassles of downsizing or the burden of new debt. Clay Financial’s Home Equity Sharing Agreement offers a new way to manage your home equity, helping you navigate life’s financial challenges with greater flexibility and peace of mind.
- See the Government of Canada’s explanation of the principal residence tax exemption for more information. ↩︎
- Based on the Canadian Real Estate Association’s MLS Home Price Index (benchmark price; aggregate; composite). ↩︎
