The Piattelli Perspective: Why Home Equity Is Not “Free” Money
When I see or hear conversations about home equity, I get a little upset about how it’s portrayed.
Equity—the difference between what your current home is worth and how much you have left to pay on your mortgage—is a powerful concept.
I’ve used the equity in my home over the years to consolidate debt, home renovations, or pay for large expenses, like my kids’ education.
How equity is often discussed is that it’s “free money.” You’ve purchased your home and now you’re riding the wave of historical home appreciation.
But, it’s not quite that simple.
Let’s work through an example of why home equity isn’t free money.
20% Down Payment
5 Year Fixed Rate
Principal Paid Over 5 Years
Interest Paid Over 5 Years
Mortgage Balance Remaining
Yearly Property Taxes
Yearly Home Insurance
Total Basic Cost Over 5 Years
Let’s say that the value of your home increased from $600,000 to $750,000. It appreciated in value by $150,000.
The cost to that appreciated value is the interest you paid—the $100,823—plus the additional costs to maintain the home—the $51,000.
In reality, you are actually down $1,823 even though your home has appreciated $150,000.
Why Even Buy a House?
If this is the case, and we’re still losing money even when house prices appreciate, why buy a house at all?
We buy a house for stability and ultimately the ability to sell it in the future, hopefully, for more than what we paid. This is money that is available for the next phase of the life cycle. The amount of equity that we've built through that time is the investment of principal.
When I hear in the media that equity is “free money,” I 100% disagree as it’s not free money.
There was the cost of interest, your taxes, your utilities, home insurance, and then all of the other stuff that goes into your home—lawn mower, snow shovels, furnace filters, etc.
Why I’m Fired Up About Equity and Our Government
Since 2020, there have been a few studies and reports released about taxing home equity and capital gains on primary homes in Canada.
In the most recent taxation report (January 2022), the federal government’s mortgage insurer, Canada Mortgage and Housing Corporation (CHMC), recommended the government should look at “annual surtaxes of 0.2 per cent to 1 per cent on the value of a home beyond a million-dollar threshold.”
Meaning, that if your home appreciates over a million dollars, the government would charge between 0.2 - 1% on that appreciated value, which you would have to pay when the home is sold or inherited. The report estimated it would cost Canadians nearly $5.8 billion.
Perhaps the most misguided part of that report was the line that said this taxation would target the “housing wealth windfalls gained by many home owners while they sleep and watch TV.”
Obviously, the sole purpose is to generate another venue for a tax grab. This isn’t the first time the Liberal government has increased taxes on homeowners.
The fact that the Liberal government is even considering taxing equity, is an insult to the people who have spent years supporting the overall economy by being a homeowner.
They paid the property taxes. They paid for the utilities. They paid for the services. They worked to make that money.
They paid to earn that right to access that equity.
So, why is this taxation even a consideration?
Our former finance minister, Bill Morneau, said it best in an interview with CTV News.
“[He] said that he was and still is deeply concerned that Ottawa is spending more time finding ways to redistribute wealth across the country than focusing on the importance of enhancing collective prosperity.”
Where I Hope We Don’t Go
Unsurprisingly, the federal government's overall focus is generating cash flow via another tax.
If this type of taxation were to come in, we’d see an environment similar to the United States, where people consistently refinance their house to 80%, if they can afford it, as a means to minimize the tax payment on the equity portion.
All our current government is looking for right now is the money grab, from hard working Canadians, to fuel their excessive spending and social programming.
However, if they were to focus their time on creating a vibrant economy, we could achieve a lot more goals for everyone and create a more equitable environment.
What Do You Do With Your Current Equity?
It’s hard to know if this taxation policy will be put in place, I suppose it depends on how desperate our government gets.
As it stands right now, there are no taxes paid on the equity in your home. You can access your equity through a mortgage refinance or setting up a Home Equity Line of Credit, which is a financial tool I’m a big fan of.
At the end of the day, I don’t want to pay the government more than I have to and I don’t want you to either.
If you want to talk about taking out some equity in your home or to discuss the latest political woes, give me a call.