For many Canadians, their home is their only real asset. As home ownership becomes more and more expensive, many of us find it extremely difficult to even entertain the concept of buying a house at these prevailing prices, let alone qualify for a mortgage. If you have purchased a home several years ago, you may be sitting on enough equity to take advantage of some potentially lucrative investment strategies.
*Note this blog is not endorsing any product, strategy or individual companys offerings.
**We highly recommend that you consult with your financial advisor, lawyer and or accountant for an unbiased opinion prior to making any decisions. The opinion of this blog is not to be misconstrued as individual advice. Each persons situation is unique and a full financial review should be taken prior to entertaining such strategies.
So how does ones home actually pay their mortgage?
Consider the following example:
Lets say you purchased your home 10 years ago for $500,000 and you put 20% ($100,000) as your down payment; this would have eliminated the need to obtain mortgage insurance. Fast-forward the clock 10 years; your $400,000 mortgage is now approximately $275,000 based on a 3% interest rate, while during that time your home value appreciated to $800,000.
Lets say you decided, at this point, to refinance your mortgage and unlock the power of the equity in your home. For the purpose of this example, we will assume that you qualify for a new mortgage of $640,000.00 (80% of todays value); your new mortgage payment would jump from $1,890/mth, based on your existing amortization of 15yrs, to a revised payment of $3,000/mth, based on a 3% rate and a 25yr amortization. However, you now have unlocked equity of $365,000 ($640,000 – $275,000).
Now lets say you invested your equity of $365,000 at a rate of 10%. The income you would receive from this investment would be approximately $3,041/mth. Your income from this investment would eliminate your monthly mortgage payment and allow you to invest your $1,890 (regular mortgage payment) into a qualified RSP, TFSA or other investment. Albeit you will be responsible for declaring your income from the interest on the investment you choose, this still may be a good opportunity for you to generate accelerated savings. A tax professional should be consulted to determine the best investment vehicle based on your marginal tax rate.
So the question is, what investment pays 10% safely? We leave that up to you to discuss with your financial professional. The main idea is that you have enough equity in your home to unleash an opportunity in an ultra-low interest rate environment. You could use your equity to build wealth in numerous investment vehicles, which may include, but are not limited to: Mutual Funds, Stocks, Bonds, Private Mortgages, or even Rental Properties. Some may even take this opportunity to buy an already established business. The point it is, your equity is dormant and could be used to generate further returns!
– Lionel Khoury, AMP