Perhaps the most important difference between renting and owning a home is the ability to own and grow equity. While with renting you are only contributing to your landlord's equity, homeownership gives you the ability to build your own. For first-time homebuyers trying to get into the housing market, it's crucial to understand what exactly home equity is, and why it’s important.

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What is home equity

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Simply put, home equity is the value of a homeowner's investment in their property. This means that it is the portion of the home that they actually own at any given time based on its current market value. Because equity is based on the property’s current market value, its value fluctuates over time. In traditional homeownership, equity is first purchased with the initial downpayment of the home, in Toronto this is between 5-20%, depending on the value of the home. From that point onwards, building your equity takes place as you pay off your principal loan and interest each month through your mortgage payments. So the two primary ways to grow your home equity are through your monthly mortgage payments and your home’s increase in market value.

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Why is it important

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For many, home equity is a central way to build personal wealth, as its value grows over time. As you grow your equity, the benefits carry over to when you’re ready to move out of your home. When you sell your property you will profit from the amount of equity you own based on the home’s value at the time of selling. This is a significant benefit compared to renting. Rent prices often rise during the extent of a tenant's stay, but because they don’t own any equity in the property, they will not be able to profit and will actually be spending more money from the increase in market value. At the end of a tenant's stay, renters will also not make any money back.

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