Aug 132013
 

One of the benefits of home ownership is the ability to secure a loan against it, other than the primary mortgage. This can be done through a home equity LOC, or a second mortgage.

A few years ago I was part of the young and prudent group of people in their early twenties who bought a home in Canada when we could still amortize an insured mortgage for 35 years :o I bought a $230,000 apartment with a $15,000 Down Payment with unfortunately meant I had to purchase insurance, but fellow personal finance blogger Cassie was part of that same group, and like she mentions, who at that kind of age can afford a 20% DP :?

Most Canadian banks will let someone borrow against their property up to 80% of the market value. They call this the loan to value ratio. 80% LTV ratio gives the lender a 20% margin of safety, meaning local house prices would have to drop 20% before the bank will be at risk of losing money.

Maximum I can borrow = 80% of property value = 0.80 x $230,000 = $184,000
My mortgage balance in April 2009 = $215,000
Difference -$31,000 :(

Since I’m already borrowing more money than what my LTV amount will allow, I can’t unlock any potential liquidity in my home :cry:

Okay, now fast forward to today. By only ever paying the minimum on my mortgage payments the balance on my mortgage has barely changed. Today my mortgage balance is about $202,000. You’re probably thinking cheese-&-rice, Liquid, after 4 years you’ve only managed to pay off 6% of the initial principle? I know. It’s not very impressive :P, but that’s just how I like to roll :roll:

Earlier this year in April I blogged about how I won a farm at an auction and had to raise $25,000 to complete the downpayment by August. Luckily the purchase deadline has been pushed back until October, but I still need to come up with the money nonetheless. So back in May I decided to apply for a Home Equity Line of Credit with CIBC. The appraisal came back valuing my apartment at $280,000 :)

Maximum I can borrow = 0.80 x $280,000 = $224,000
My mortgage balance in May 2013 ~ $203,000
Difference = $21,000 :D

Ding Ding Ding! I can get another loan :D The entire application process took about 5 weeks. Afterwards I saw that a new HELOC has been added to my list of Credit accounts. I haven’t used it yet but I will when I require the money.

13_08_helocpapers_bankacct

For a long term investing strategy I believe it’s much more effective to invest aggressively, especially when you’re young, rather than pay down the mortgage quickly. I could have committed an extra $200 every month towards tackling my mortgage. But that wouldn’t even add up to $10,000 over the last 4 year period, which is almost laughable compared to the property appreciation realized in the same amount of time ;)

Just imagine the massive savings effort it would take for someone to pay down an additional $50,000 off the principle on their mortgage 8O Now imagine someone else who buys a 2nd home, waits around for several years, and also experiences a $50,000 net worth increase. Which person would you like to be :cool: ? Nobody ever gets rich by paying off their debts :| We get rich instead by continuing to build our asset column. This is exactly why I chose to put my savings into acquiring that farm (an asset that will generate $5,000 of income per year) instead of into the equity of my home.

I know Vancouver’s real estate market is a bit of an anomaly. But throughout Canada, most cities have seen a pretty consistent demand for housing. Even locations with urban sprawl show no signs of deflationary pressure. In Edmonton for example, the number of homes sold last month in July was almost 25% higher than the same time last year. 12_12_real_estate_prices_canada

Some people say you shouldn’t count the equity in your primary residence as part of your net worth because you can’t sell your kitchen. Well maybe those people just don’t know how to unlock all that potential liquidity which can be used for emergencies, university tuition, a second car, a long vacation, investing, or anything else they want (゜∀゜) as long as they use it responsibly. It’s true you can’t “spend” your home per-se, but you can make use of it’s value for financial purposes :) Next week I’ll post how to open up a HELOC so you can unlock the potential of your home too :D

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  23 Responses to “Unlocking My Home; Risky, but Full of Possibilities”

  1. We used our HELOC in pretty much the same way, except that we extended it against our rental property in order to buy our undeveloped canal lot.

    • Your guy’s lot will be worth so much money some day :) Real estate in a politically safe country like the US or Canada is most likely going to be a good long term bet :D As long as you have the cash flow for the leverage, why not 8-)

  2. I always love reading your posts about your investment properties. You just have this energetic, exciting way of talking about it. I would be too nervous to take out loans like this but that’s why you’ll be richer than I am, haha!!

    • Thanks, I was just fortunate. If Canada had a sub-prime mortgage crisis during the last recession I would have seen my net worth cut in half within months lol. Luck of the draw I guess :)

  3. Thanks for sharing all of this information as it’s always useful for me to learn from. A friend of ours bought her second home with the 35 yea mortgage and rents out one house and lives in the other.

    • If she continues on that road she will one day be able to just live off her rental units :) It’s like what Robert Kiyosaki always say to people: If you have enough real estate then you don’t have to stress out and worry about a retirement plan or building up a nest egg or an RRSP. Because your properties will be your retirement plan :0)

  4. What rate did you get on the HELOC? I am in the same camp, still banging my head against the wall for overpaying my mortgage for a while at the beginning, now I am putting all the cash toward other investments with a much higher return

    • It’s floating at prime + 0.5% and prime is 3% in Canada right now :) so 3.5%. But since the interest will be tax deductible, the effective interest rate is more like 2.4%. The farm investment will generate at least that much in rental income alone so I’m pretty stoked about that :o

  5. I’m with Cat. I love reading about your investing adventures and am always in awe about how quickly you’re building wealth, but, I too am too chicken to take these risks. :-)

    • I was just in the right place at the right time. Research has shown that women are actually better investors than men in general because it’s the aversion to risk and careful scrutiny that makes women diversify more and avoid low quality investments, which give women a higher return overall. I’m sure both you and Cat will also build up your wealth in your own way :D

  6. As I’ve said before, as long as you make more than you payout, it makes sense… HELOC’s are a great reward for owing your own home if you are an investor (^U^). If you time your borrowing for market drops it can even compound the rewards. In 2000 when the tech markets crash, we borrowed money to invest while everyone else panicked, and slowly paid it off over the next 5 years as the markets recovered; When 9/11 happened, we topped up our borrowing again and capitalized on the market reaction and again slowly paid it off; in 2008, we bought a second property as everyone else panic and sold as the financial crisis took hold and have been slowly paying it back and enjoying the fruits of our investing habits; In 2011 as the market corrected, and I lost my job again we used the HELCO to borrow a few bucks and invest in the market drop… See a reoccurring theme here? The market always move up and down, so why not sync your investing habits with the swings? The only issue I have with most who use HELCO’s are that they very rarely try to pay them off, which I think, based on my notes will eventually catch you off guard instead of always being able to be ready for the next opportunity. Remember greed is the root of all evil – balance and patience always pays off – Cheers.

    • That’s a great strategy. I guess when you’ve been investing for as long as you have you actually do see reoccuring and predictable themes in the markets :) After borrowing from my LOC later this year I plan to pay it all off within 2 years or so. And then maybe dip into it again in the future when we see a pull back in stocks or something ^_^ Who knows, maybe I’ll follow what you did and buy a second property if we see a housing correction.

  7. I like your ballsy style! We tend to shy more towards paying off our mortgage because that will be a requirement for our early retirement. But, we also bought a second condo, so I guess we do a bit of both. Leverage is gutsy, but you’re right – you get rich by accumulating assets.

    • It’s the only style I’ve got lol. You guys are doing great, in some ways ahead of me with your second property already. The nice thing about paying down debt you know you’re making a guaranteed returned :)

  8. i think one needs to go back more than 10-15 yrs to see the full effects of the housing cycle. has to include at least the 80s! RE, just like stocks going thru its 15-20 yr cycles, go thru major cycles that last a while

    • It’s almost sad that people have such short term memories about the capital markets. We’ve seen housing cycles last 7 to 10 years before, but this bull market has been a lot longer than usual. People don’t realize that if interest rates climbed back up to normal or even higher like in the 80s their monthly mortgage payments would increase many times 8-O. Have to be careful when using one’s home like an ATM.

  9. Basically an individual must concentrate on building there asset column, and ideally ones that cash flow. I also believe people should pay off their bad debts (debts you pay for yourself such as consumer debt). Using good debt (tax deductible debt aka leverage) is not for everyone but those who can use it to their advantage will usually get wealthier a lot quicker.

    • I’m on the same page. Building assets is key :D In the long run both stocks and housing will probably go up in value. If we pay down our mortgage too quickly we may miss out on the gains in the stock market. But if we invest heavily in the stock market, we still get all the benefits and appreciation of our property. Putting money into paying off the mortgage doesn’t increase the market value of our home. But putting money into stocks WILL increase the future value of potential stock market gains. Since the majority of the wealth earned from real estate comes from capital appreciation anyway, ($50K in 4 years in my case) any additional payment we make to the property doesn’t matter as much relatively speaking.

  10. What an informative post. I’ve learned A LOT from reading it.

  11. […] for a HELOC. I opened up a HELOC earlier this year. I just called my bank (CIBC) and asked to speak with someone to help me get a […]

  12. […] $21,000 – HELOC. Applied for, & was granted approval for a home equity line of credit to borrow money against my condo. […]

  13. […] Thirty Five blog gets ballsy with a Home Equity Line of Credit to help fund his farm […]

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