Investing

80K HELOC to invest in TFSA/RRSP

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  • Sep 4th, 2017 10:52 pm
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[OP]
Newbie
Apr 7, 2017
14 posts
1 upvote

80K HELOC to invest in TFSA/RRSP

Myself and husband are 28 years old. Our only debt is our mortgage.

Current investments are:
$80,000 equity in home (300k - 220k mortgage)
$60,000 TFSAs (aggressive CCP portfolios)
$0 RRSPs

Would you pull equity today to max TFSAs and start RRSPs? Portfolios would be aggressive CCPs at Questrade (30+ year investments).

Would you use HELOC or another loan product?
Last edited by User353402 on Sep 18th, 2018 1:18 pm, edited 4 times in total.
15 replies
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May 11, 2014
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Iqaluit, NU
If I were in your situation, no. When I borrow money to invest, I do it non-registered so that I can claim the interest I pay as carrying cost on my income taxes. When you put it in a TFSA/RRSP, you lose this ability. Mind you, if you feel like you can earn more than the interest you pay, borrowing any money at lower than your rate of return is a good thing. That being said, that is a lot harder to do with mutual funds and etfs.

Additionally, rates are looking to go up which may put a cap on your earnings potential and increase your interest cost.
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[OP]
Newbie
Apr 7, 2017
14 posts
1 upvote
xgbsSS wrote:
Aug 31st, 2017 9:38 am
Mind you, if you feel like you can earn more than the interest you pay, borrowing any money at lower than your rate of return is a good thing.
Would it be flawed to project my "earned vs paid" over 30 years, given that would be the time frame for my investments. Year over year is too unpredictable.

I admit, i do not fully understand how interest is calculated on the HELOC yet. Early stages of research.
I may be better off with an 80k second mortgage(or equity loan?) with a fixed rate. That way I could more easily project returns and calculate interest. If(when) rates rise to more than projected earnings, i could switch to paying back the mortgages instead of investing.
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User353402 wrote:
Aug 31st, 2017 10:06 am
Would it be flawed to project my "earned vs paid" over 30 years, given that would be the time frame for my investments. Year over year is too unpredictable.

I admit, i do not fully understand how interest is calculated on the HELOC yet. Early stages of research.
I may be better off with an 80k second mortgage(or equity loan?) with a fixed rate. That way I could more easily project returns and calculate interest. If(when) rates rise to more than projected earnings, i could switch to paying back the mortgages instead of investing.
Yes, it is flawed because in all honest truth... how do you really know how much you are going to earn? You will not know what markets do. While a second 80K second mortgage would lock a rate, you then become tied down with a second mortgage, you are only tied for 5 years, plus you have the cost of the mortgage to factor in. A HELOC once set, would be more prudent, but I wouldn't use your entire equity.

Also, without knowing your full financial situation, how much equity on how much house etc., it isn't prudent or wise for anyone to speculate what you should do. Based on the fact your investment plan sounds passive and you are now taking your borrowing money and putting in tax-sheltered products, and on the side of caution, no.
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Deal Fanatic
Nov 24, 2013
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HELOC interest is typically bank Prime rate (2.95% at the present) plus a premium, typically 0.5%. Your monthly HELOC interest is just that 3.45% rate times your average borrowed balance for the month. So if you borrow a full $80,000, that's $230/mo. Prime rates are variable; they're affected by BoC rate meetings and can change as frequently as every 6 weeks (in practice there's only been 3 changes in the past 7 years, two down 0.25% each, one up 0.25%).

Pros: Borrowing to max your TFSA now allows you to take advantage of the tax-free compounding sooner. CCP-Aggressive returns should outpace the interest rate.

Cons: The interest is non-deductible, where it could be down the road if you took out the HELOC as an investment loan for non-registered accounts. It's unclear whether contributing to RRSPs makes sense for your family situation or not.

An alternative to consider is upping your TFSA contributions instead without borrowing. If you can budget $230/mo for the interest, maybe try adding at least that each month to TFSAs?
Deal Addict
Jul 27, 2017
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EDIT:

OP, those are great points made by xgbsSS & Mike15 above

Take the current HELOC best rate is 3.45%, that for every $10k borrowed the interest is $28.80/mth. Rates may fluctuate, likely to the upside in the future.

Are you able to get an investment with a return better than what you'd be paying in interest over the course of 5, 10, 15 years? If you are investing at a net loss then don't do it. If you are able to get at least double return to the interest paid, then you should consider it.

No reason to leverage if you are not paying yourself
Sr. Member
Feb 21, 2010
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Scarborough
what is the value of your home? You will get only up to 80% less outstanding mortgage as Heloc. So if the value is 300k, then you will get only 20k heloc. IMO not worth time and money to set this up for 20k
Deal Addict
Oct 4, 2009
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User353402 wrote:
Aug 31st, 2017 9:30 am
Myself and husband are 28 years old. Our only debt is our mortgage.

Current investments are:
$80,000 equity in home (300k - 220k mortgage)
$60,000 TFSAs (aggressive CCP portfolios)
$0 RRSPs
A house is shelter, you shouldn't consider it in your investments. It makes sense to include in a net worth statement but not in investment planning.
Would you pull equity today to max TFSAs and start RRSPs? Portfolios would be aggressive CCPs at Questrade (30+ year investments).
Nope. If you are able to, assign a large part of your income towards those goals of maxing out your TFSAs and RRSPs if they are important to both of you. There is no necessity or benefit to the borrowing component of your proposed plan.
[OP]
Newbie
Apr 7, 2017
14 posts
1 upvote
Some wonderful advice here. So appreciated.

Just wanted to offer a little insight into family situation, in case it changes advice, especially those who are suggesting to handle the "maxed TFSA & RRSP" goal with our income, without borrowing:
Our joint salary is 120k gross, 86k take home.
Yearly fixed expenses are just 30% of takehome. This includes all the crooks and criminals (mortgage, property tax, utilities, home/auto/life insurance, internet/cable, cell phones).
Variable expenses are about 10%.
Then, we blow about 22% on vacations/entertainment/personal each year.
38% of take home income remains for investing/saving/giving (around 32K/year).

This is our first year catching up on investments, after spending the last 2 cash flowing a full house reno and our wedding. We achieved these goals without borrowing, and are now turning focus to investing/retirement "catch up". Neither of us has an employee pension plan, so we feel behind in this area.

No children planned for at least 2+ years, so I expect to have this excess 30K for at least the next 2 years.

In Jan 2018, our total TFSA contribution room will be 57.8K. The original plan was max this out over next 2 years, using our yearly 30K excess.
We would then be 30 years old, and opening our first RRSPs. Assuming we can keep up the 30K/year contributions (a stretch if children and mat leave enter picture), I've calculated that we would start getting tax refunds that would almost be enough to max the TFSA contribution room going forward.

This is an exciting thought, but I've recently started reading about leveraging and borrowing home equity and wondering if we can't get there faster, using the banks money.

Once again, all thoughts and advice is appreciated. Would love for everyone to poke holes in my slow plan and encourage or discourage this new appetite for risk.

Sorry this is long winded, but it seems people are looking for a fuller picture in order to properly advise.
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Jan 20, 2016
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User353402 wrote:
Aug 31st, 2017 9:30 am
Myself and husband are 28 years old. Our only debt is our mortgage.

Current investments are:
$80,000 equity in home (300k - 220k mortgage)
$60,000 TFSAs (aggressive CCP portfolios)
$0 RRSPs

Would you pull equity today to max TFSAs and start RRSPs? Portfolios would be aggressive CCPs at Questrade (30+ year investments).

Would you use HELOC or another loan product?
TFSA vs RSSP it's a question itself beside the source of funds.
In general with PERSONAL yearly income 50k or less it's better to invest in TFSA, 80k and more - RRSP. 50-80k - grey zone where both are ~ equal.
There is a "trick" to maximize RRSP room and tax return from it invest in TFSA :)

I would invest HELOC (I did personally, to use RRSP to get tax refund paying back part of HELOC with it :) ) but NOT the 100% of theoretically available amount. E.g. if house PRICE is 500k, mortgage is 300k, available equity is 100k. BUT, do remember HELOC could be called back in 30 days notice in case you house drop in price or on bank discretion. Thus, I'd invest max 50k in such situation and have some other possible fund to cover it if bank call HELOC back (like personal LOC unused for now, but being kind of rain fund)

Better to use only equity available under scenario of -20% price drop (I do not expect this to be a long trend, but depends on your timing of buying, short-time fluctuation are possible as we can see)

P.s. if 400k it's a house price with 300k mortgage, you have only 20k equity and wouldn't touch it in such scenario
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Deal Addict
Jul 27, 2017
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1 - 10 year financial plan & who knows what that can come around

In your current position - both working net income $86k, a $200k mortgage, current expenses running $50k - 60k, a good TFSA & zero RRSP

2 years down the road 'children', then it's one salary. Do one of you intend to be stay at home parents, then what about child #2?

Can one salary carry all the expenses, mortgage, child expenses, still need holidays etc.

So what about between now & child #1, would you consider paying off the mortgage, forget TSA contributions or RRSP's?

Let current TFSA compond

On the birth of child #1, then possibly child #2 (or will you have twins or triples?) - one wage coming in mortgage free, start looking at TFSA again & possibly spousal RRSP if one of you is 'stay at home'.

With spousal RRSP there is the option every 3 years to take the money out if needed with little tax, use it for TFSA, investments

or option 2

Carry on as is wit two incomes cash flow about $30k/year. Use $20k for TFSA & RRSP or non-registered investing

Child # 1 comes along. Lifestyle changes.....loss of a full salary & possibly the free cash surplus flow of $30k. One salary for 12 months or sooner, Mum returns to work, pays childcare expenses.

Still paying mortgage, added childcare expenses + additional child costs, can't afford RRSP's, or little to TFSA, maybe vacation or splurge money.

If you are planning on working after you have children there is a cost to this
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Feb 19, 2010
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My two cents...happy to get it back if nobody thinks it's worth it. :)

I would be disinclined to borrow money to invest in registered accounts because I wouldn't want to forego the interest expense deduction for tax purposes. I don't see throwing away that 3% (and likely rising) deduction per year (my heloc is at P) and makes the required returns in the registered accounts to get ahead just that much harder to obtain.

As such, I'd fund the TFSAs or RRSPs, as the case may be, from the annual surplus funds from employment and, if deemed absolutely necessary, borrow money from the HELOC (not likely to be $80K in this example if that is the amount of equity in the house) to invest in non-registered accounts.
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Nov 24, 2013
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Don't know if $120k gross combined is $60k+$60K, $70k+$50k, etc., nor what province you're in. Whether RRSP contribution makes sense or not can depend on how far into a tax bracket you are, what your expected future income growth is, and so on. Things like union dues or other deductions reduce your net income below your gross, which affects the marginal refund rate you get on RRSP contributions. How to optimize RRSP contributions is basically a thread unto itself. :)
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Jul 18, 2016
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Conquistador wrote:
Aug 31st, 2017 1:43 pm
My two cents...happy to get it back if nobody thinks it's worth it. :)

I would be disinclined to borrow money to invest in registered accounts because I wouldn't want to forego the interest expense deduction for tax purposes. I don't see throwing away that 3% (and likely rising) deduction per year (my heloc is at P) and makes the required returns in the registered accounts to get ahead just that much harder to obtain.
I agree with this unless you can pay it all off with your tax refund. I actually exploited an RRSP line of credit. I was lucky because the markets were rising greatly at the time. However, I now have 5K of debt I can't pay off in full, and the markets have been flat. In other words, I am losing my gains to interest now. Hopefully, i can pay this off soon, or we'll get a nice increase in the index I'm invested in.
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Oct 1, 2004
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isnt it 65% instead of 80% for HELOC?

$86K take home pay carrying a 220K mortgage is already tight without kids, investing in HELOC now when interest is rising/market+housing at all highs and possibility expecting a child soon is not a good idea. If both the market and housing market crashes at the same time, with only $60K in savings how would you pay back the HELOC if the bank calls it?

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