Last Updated on July 8, 2022 by Admin
Affording your child’s tuition fees can be challenging if you do not have a registered education savings plan (RESP) for them. Let’s leave aside college and university for the moment; sending your child to a good private school costs anywhere between $4000 and $26000 a year, depending on the school and its amenities.
And no matter how expensive education gets, you cannot compromise your child’s future. This article brings you a unique method of paying for your child’s tuition using your home equity. To know more about RESP and its rules, visit this page.
What is RESP?
RESP Is an investment plan for your child’s education wherein you deposit funds in your RESP account under any financial Institution, and your child can withdraw it for their educational needs.
What makes RESP a profitable scheme is that the amount you deposit in this account is non-taxable. Also, the Canadian government, under the Canada Education Savings Grant (CESG), offers an additional 20% of the first $2500 deposit to each beneficiary. On top of that, your child also qualifies for a maximum of $500 per year and $7200 in total incentives until they turn 18.
However, if you have other financial commitments to take care of, it might be impossible for you to deposit a certain amount in the RESP every month. If financial constraints keep you from opening an RESP account, consider using your home equity to pay for your child’s education.
What is Home Equity?
Home equity is the total market value of your property minus any outstanding mortgage amount you have taken against your property. Hence, any time you make a mortgage payment or the value of your property increases, your home equity value also shoots up.
Suppose you purchased a home at $300,000, and its current market value is $350,000. In that case, if you have an outstanding mortgage of $100,000, your total home equity value is $250,000 i.e. $350,000 – $100,000.
When Can You Take Out a Home Equity Loan
You cannot always qualify for a home equity loan even if the property is registered in your name. Banks and financial institutions have certain criteria to ensure they invest with a secure party. Kindly check this How Does a Construction Loan works?
Here are a few requirements you need to meet to qualify for a home equity loan:
- A good credit score
- Low debt to Income ratio
- Stable source of adequate income
- Sufficient percentage of home equity
- Clean repayment and financial record
The best part about taking a home equity loan is that it does not limit your investment domain. This means that the loan taken against your home can be used for professional as well as personal needs, including vacations, weddings, and education.
However, since your home stands as security here, it’s best to invest in long-term plans where you have enough time to repay the amount. After all, no matter what opportunity comes your way, you certainly cannot risk your home.
What Is an Ideal Home Equity to Take a Loan?
Currently, Canadians are allowed to borrow up to 80% of the total appraised value of their property minus any outstanding mortgage payment. It’s best to raise at least 20% of home equity before taking out a loan. Also, keep in mind that you cannot use the entire equity value for your loan.
When Should You Use Your Home Equity to Pay For Your Child’s Education
Even if your first instinct is to take out a loan against your home to pay for your child’s education, there are a few things you need to consider before actuating your resolve. In our opinion, using your home equity in these situations will benefit you the most:
1. Your Child Cannot Afford a Student Loan
While college students have the competence to take a student loan, your teenager might not. So, if your child is still in school or is not qualified for a student loan, taking a loan against home equity might be a good choice.
However, if you have both options available — student and home equity loans- always go for the former.
Here are a few benefits of using student loan:
- Low-interest rate
- Fixed interest rate
- Easy repayment options
- Low credit score threshold
2. You Have an Upcoming Long-term Financial Investment
After all, since your house secures the home equity loan, you might lose it (your house) if you fail to repay on time. Also, if the housing market suddenly crashes and your house’s value dips, you will end up owing more than your house is worth.
That’s why taking a home equity loan only makes sense if you have other long-term projects in mind, along with your child’s tuition.
For instance, if you want to renovate your house in the near future, you can take out a loan and use it both for home improvement and your child’s tuition. Similarly, if you want to consolidate all your debts into one single loan, home equity is the way to go.
3. Alternative to Federal Direct PLUS Loan
A lot of parents invest in Federal Direct PLUS Loan to support their child’s education. While it is undoubtedly a profitable scheme in many ways, home equity can turn out to be even more beneficial.
For example, you can qualify for interest rates lower than what Federal Direct PLUS Loan offers, depending on your financial record. Not to mention, Federal Direct PLUS Loan charges a percentage of the loan amount as a fee, whereas home equity loans do not require any additional charges at any point in their tenure.
Bottom Line
Financing your child’s education can be overwhelming. Tuition isn’t cheap, and lifestyle costs are on the rise too. Sound financial planning demands well-planned loans. And what can be better security for your loan than your own house? Instead of letting your property’s value go in vain, use it to raise your child’s education fees and secure their future.
