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Rates Are High. The CAD Is Low. Why Leveraging Your U.S. Home Equity Might Be Your Best Bet

By Diane Amato

Published March 7, 2023 • 7 Min Read

Canadians who like spending their time and/or money in the U.S. face a double whammy these days. The Canadian dollar is declining as interest rates increase —affecting mortgage payments. Doing a CAD to USD conversion at the time of writing, the USD is 34 per cent higher than the CAD, which means the loonie isn’t going nearly as far as Canadians would like.

Living south of the border has become more expensive, just as the currency exchange has been at its lowest in the past few years.

Why is the Canadian dollar weaker against the U.S. dollar?

Over the past year, the Canadian dollar has gradually weakened against the U.S. dollar, largely because of rising interest rates south of the border. As the U.S. Federal Reserve has been trying to combat inflation by increasing rates, its currency — which is one of the strongest globally at any time — has become even more attractive to foreign investors. Canada’s economy is much smaller, so its dollar can’t keep up as its American counterpart gathers strength. The unfortunate result for Canadians is a dollar hovering around 75 cents compared to the U.S. dollar benchmark.

How can U.S. property owners access U.S. cash?

With a potential recession on the horizon, it’s more important than ever to be strategic about your cash sources. If you own property in the U.S., you likely have several financial obligations that must be handled with U.S. funds.

If you convert your CAD to USD, the exchange rate might sting. But you don’t want to give up your U.S. property. After all, selling your U.S. home has tax and financial implications that you may be unprepared for.

So, what do you do? Leveraging the equity you’ve built up in your U.S. property can give you access to the U.S. funds you seek.

“If you already own a home in the U.S., especially in key sunbelt states like Florida, Arizona or California, you might have more equity than you realize.” Says Alain Forget, Head of Sales and Business Development for RBC Bank. “Over the last three years, home values in these states have increased somewhere between 30 and 40 per cent, which creates a huge amount of home equity.” But with that equity comes rising costs, Forget warns, “Property taxes and home insurance have increased, plus the overall increase in the cost of living.” He credits leveraging home equity as one solution to help mitigate rising costs, especially if you don’t already have USD on hand.

“If you don’t want to give up on your cross-border lifestyle by selling your U.S. property, why not consider the U.S. home equity you’ve built in the last few years?” He’s also quick to call out additional fees that condo or townhome owners might face, warning, “Beyond all of the increases in U.S. home-related expenses, condo owners may also have to pay for a ‘special assessment’ before listing their condo.”

To sell or to leverage your equity?

Home equity is the difference between the value of your home and how much you owe on your mortgage. For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in home equity.

“Some Canadians bought U.S. properties in cash around 2010-2012 when the CAD was at or around par with the USD. Let’s say you bought a property worth $200,000 USD in 2010, now valued at around $400,000 USD. Now that the CAD to USD conversion is around $0.74, you’d realize significant gains from leveraging your home equity.”

So, what do you do if you’re sitting on U.S. home equity? “The world is your oyster,” says Forget. “You’ve got two key options here — cash out by selling your U.S. property. But that comes with its downsides, like paying capital gains taxes on both sides of the border.” The other option? According to Forget, a home equity line of credit (HELOC1), “You can soften your strategy by using a HELOC to access USD or convert it back to Canadian and take advantage of the current weaker CAD. A HELOC is a non-taxable event, so I strongly suggest seeking professional advice from your Canadian financial advisor or planner before making any decision.”

The benefits of leveraging your home equity

The most common way to tap into your home equity is through a HELOC. Working much like a regular line of credit, you can borrow money up to the credit limit whenever you want. And, when you pay it back, you can borrow it again. Because the line is secured against your home, interest rates are generally considerably lower than other unsecured forms of credit.

While interest rates have risen on HELOCs over the past year and other forms of borrowing, their 6-7 per cent interest rate more than offsets the conversion rates and fees you would face should you convert CAD to USD. As such, leveraging your equity through a HELOC is a highly efficient way to access U.S. funds. On the flip side, should you need to boost your Canadian cash flow, you may come out ahead on the conversion when you use U.S. funds accessed through your HELOC to buy Canadian currency.

Hear Alain Forget speak to the benefits of using your U.S. home equity

A HELOC also offers several other advantages:

  • Convenience: Once your HELOC is in place, you can borrow money from it as you need it without needing to reapply.

  • Flexible repayment options: You can make interest-only payments or pay in larger chunks to reduce your balance.

  • Potential to raise your U.S. credit score: Adding a HELOC to your U.S. credit portfolio and making regular, on-time payments can boost your U.S. credit score, which could come in handy for any future U.S. property purchases or other lending needs.

A word of caution: Use your HELOC wisely

Because a HELOC makes it easy to access potentially large sums of money (up to 80 per cent of your home’s value), consider the consequences of this form of credit. For example, its convenience and flexible payment options make it easy to access cash impulsively and overspend against your budget. And, because you’re using your home as collateral, defaulting on your loan could put your home at risk. It’s also worth keeping in mind that as you reduce the equity in your home, there will be less cash left over should you sell or refinance before paying off your HELOC.

Make the most of the equity you’ve built in your U.S. home. The U.S. cash you can access can enable you to hold onto your property, boost your cash flow, and benefit from the strong U.S. dollar.

RBC Bank, Equal Housing Lender. Member FDIC. ® / ™ Trademark(s) of Royal Bank of Canada. Used under license. RBC Bank means RBC Bank (Georgia), N.A., a subsidiary of Royal Bank of Canada. © RBC Bank (Georgia), N.A. 2023

1 Home Equity Lines of Credit (HELOCs) are subject to approval, including verification of acceptable income, credit worthiness and property valuations. Minimum and maximum property values and maximum loan-to-value ratios apply. Homeowner’s insurance is required for all loans and lines of credit and flood insurance is required if the property is located in a Special Flood Hazard area. In addition to a ½% Origination fee (with a $500 minimum and a $2,000 maximum) due at origination and a $50 annual fee, third party closing costs for Home Equity Lines of Credit may range from $900 to $9,000. Home Equity Lines of credit are not offered for properties in Texas. Home Equity Lines of Credit are not available for investment properties. An investment property is a property that is not occupied by the owner/borrower for at least two weeks per year.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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