In the eighties, when real estate was skyrocketing, pundits suggested
paying off the residential mortgage quickly through accelerated amortization
or prepayments. Once the residence was paid off, you could afford
to refinance to borrow money to buy other real estate to rent out.
The thought was that real estate was going to continue to climb 10-15%
per year.
Real estate appreciation in Ottawa no longer reaches double digits.
And this change demands new strategies for the homeowner. No longer
can we accumulate wealth quickly by simply paying off the mortgage.
We must find another vehicle. With interest rates at 30-year lows and inflation
virtually nonexistent, leveraging (or borrowing to invest) against your
residence is still a viable option, provided the investment that you purchase
is growing at a greater rate than the mortgage rate itself. Some
say that once the home mortgage is paid off, you simply take the old mortgage
payment amount and invest it. If you are the normal Canadian, if
you had an extra $1000 at the end of the month, let's be honest, you would
find a way to spend it before investing!
If you were to take out a new mortgage though, immediately after paying
off your old mortgage, these new funds would more than likely find themselves
in an investment vehicle before you knew you were investing. If the
new payment on the new mortgage was equivalent to the old payment, you
could indeed afford it. Now that you have this money, where to invest
it? The last 10 years have demonstrated that some "managed" mutual funds
may be today's equivalent to yesterday's real estate. We have seen
the stock market continuously hit new highs, week-in, week-out, for as
long as we can remember. I have seen results from several independent
financial advisors that would lend credence to the above statement.
Since real estate is not growing the way it used to, you must not let the
equity in your residence sit dormant. You owe it to yourselves to
wake up that investment potential to secure a comfortable future.
Now when should you leverage your home to invest? From a strictly
mathematical point of view, the answer is simple: borrowing to invest
makes sense when the cost of borrowing is less than your investment return.
From a practical point of view though, other factors enter into the melee
including (but not limited to) the size and composition of your portfolio,
your ability to secure a loan, your age and your risk tolerance.
At first glance, investing seems simple, borrow at 6% and invest at
12%. But this is not a simple procedure. You must feel comfortable
in knowing how your money is working and who is controlling the investments.
You must realize that ABC Bank is lending you money at inexpensive rates
because of your apparent ability to repay the loan. You are entering
into a contract (mortgage) to borrow money, totally separate from the investment
itself. If you choose the wrong investment or the wrong administrator
of the money, you must continue to make the payment on the mortgage.
There is some good news. Borrowing to invest makes the interest
on the borrowed money tax-deductible. The difference in rate between
your borrowed money and the rate of return financial planners have been
consistently getting their clients show a doubling of net worth in four
or five years. As long as you are in it for the long haul, I can't
see the mutual fund market going down for the next five years. You
must ask questions of your financial advisor on a regular basis, and demand
to see the performance of your portfolio at least monthly, you can then
make direction changes as you go. Your financial advisor is your
money making machine, but you must be the rudder.
Other questions . . .
Now that I have a mortgage on my house (to invest), can I sell my home?
The answer is yes! But like any other mortgage, it must be discharge
or switched onto another property before the closing of the transaction.
If you are going to move to another property, ask the present lender if
you can switch the present mortgage to the other property before you actually
sell the old home, this way you can keep the tax-deductibility of
the interest. If you are selling first, try replacing the mortgage investment
loan with a regular loan (perhaps using the Mutual Funds as a guarantee)
until you can buy another home.
What is the best type of investment mortgage? The best type of
mortgage for investment is truly the "secured line of credit" because it
is fully open and flexible. You needn't spend all the money right
away although having the money available (to invest) may cry out to your
personal needs and tempt you into spending it. This is not why you
took out the mortgage, and spending a portion on oneself may destroy the
tax-deductibility of the whole account . . . be aware.
Investing in the new millennium will require the vision of professionals.
Pay off your mortgage early, refinance to the equivalence of your old mortgage
payment and seek the help of professional financial advisors to invest
that money in Mutual Funds.