Personal Finance

Is it a good idea to take equity out of your house and invest with it??

  • Last Updated:
  • Apr 16th, 2021 5:39 pm
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Apr 23, 2016
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Janus2faced wrote:
what is your break cost on the 2.74% mtge (usually 3 mths)
Isn't breaking cost on a fixed term, the interest rate differential for the remainder of your term? I was under the impression it wasn't worth it since essentially you pay in penalty what you would save, plus the other legal fees...
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LMM552 wrote: Isn't breaking cost on a fixed term, the interest rate differential for the remainder of your term? I was under the impression it wasn't worth it since essentially you pay in penalty what you would save, plus the other legal fees...
in my post I gave you an example of costs + savings.

https://www.canada.ca/en/financial-cons ... tract.html

usually 3 mths interest, I gave an over estimated cost of doing it, it could be less.

you wont know the real costs unless you speak to your lender to find out the full cost of breaking including a swap out/blended mortgage at a lower rate.

then again, back to your post borrowing $50k ....whatever works for you
looking both ways wasting time doing unimportant things.
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Aug 27, 2004
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6060842 wrote: Sometimes you win, sometimes you lose. If you win consider yourself lucky. Don't fool yourself that your research or financial acumen is the reason for your good fortune. Do a search on "Archegos" and you'll find that even professional hedge funds aren't immune from leverage risks.
I might question the use of the word "even" - professional hedge funds, if anything, use a lot more leverage than your average retail investor...
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Janus2faced wrote: in my post I gave you an example of costs + savings.

https://www.canada.ca/en/financial-cons ... tract.html

usually 3 mths interest, I gave an over estimated cost of doing it, it could be less.

you wont know the real costs unless you speak to your lender to find out the full cost of breaking including a swap out/blended mortgage at a lower rate.

then again, back to your post borrowing $50k ....whatever works for you
From your Canada Mortgage information website:

The prepayment penalty will usually be the higher of:

- an amount equal to 3 months’ interest on what you still owe
- the interest rate differential (IRD)

3 months penalty is 250k * 2.74% * 3months/12months so about 1700$
or
IRD with:
remainder of my term 3.5y on 5y is 42 months
my rate (5 year fixed) 2.74%
tangerine current 5 year fixed 2.05%
250k * (2.74%-2.05%) * 42/12months is about 6000$

And again what I would save is the aforementioned 6000$. Isn't the point of the mortgage contract that the bank doesn't want to lose that money? Everyone would be doing it otherwise.
Last edited by LMM552 on Apr 2nd, 2021 12:19 pm, edited 1 time in total.
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LMM552 wrote: From your canada Mortage information website:

^^^^

And again what i would save is the aforementioned 6000$
with this information, what did you decide you are going to do?

a) go with your posted question, staying with the current 2.74% mtge + $50k 2.35% LOC, invest $10k of the LOC

b) try to renegotiate a savings through mortgage breaking, refinancing to a lower rate, maybe get a higher mortgage amount at a low rate (taking out equity) with the same payments that you are currently paying on the existing 2.74% mtge?

c) take b) with a new amortization term, run the mortgage back up to 25 year term, maybe 30 years, use any released equity that you took out for investments, thereby for tax purposes deducting the interest on the equity release money against say the invested amount .... if possible at say 5% return
looking both ways wasting time doing unimportant things.
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Janus2faced wrote: with this information, what did you decide you are going to do?

a) your posted question, 2.74% mtge + $50k LOC, invest $10k of the LOC

b) try to renegotiate a savings through mortgage breaking, refinancing to a lower rate, maybe get a higher mortgage amount at a low rate (taking out equity) with the same payments that you are paying on the existing 2.74% mtge?
A)
The LOC is already in process of getting setup so might as well use it:
- Will probably start with borrowing 5k investing in some relatively safe stocks (bank/telecom/RE) in my TFSA to see how it feels, might add another 5k later
- Will prepay mortgage by 20k, and keep the LOC credit line running in the negative since the rate is better and any loose cash is now like 2.74% interest tax free
- If I ever break mortgage to sell condo, will load up to the rest of the LOC to prepay mortgage to the max and avoid some of the penalty.

B)
I'm assuming it's not worth it with the penalty, plus probably around 1000$ in fee (legal and others). I looked up my contract and it says I am liable for the interest rate differential penalty, so even if I get a slightly better rate than the one used for the penalty calculation, I still have to cover the other fees and go through the unpleasant process. Just got to live with it for the remainder of the term... at least I got a decent purchase price before the interest went down and the prices went crazy up!
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Dec 13, 2010
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LMM552 wrote: A)
The LOC is already in process of getting setup so might as well use it:
- Will probably start with borrowing 5k investing in some relatively safe stocks (bank/telecom/RE) in my TFSA to see how it feels, might add another 5k later
- Will prepay mortgage by 20k, and keep the LOC credit line running in the negative since the rate is better and any loose cash is now like 2.74% interest tax free
- If I ever break mortgage to sell condo, will load up to the rest of the LOC to prepay mortgage to the max and avoid some of the penalty.

B)
I'm assuming it's not worth it with the penalty, plus probably around 1000$ in fee (legal and others). I looked up my contract and it says I am liable for the interest rate differential penalty, so even if I get a slightly better rate than the one used for the penalty calculation, I still have to cover the other fees and go through the unpleasant process. Just got to live with it for the remainder of the term... at least I got a decent purchase price before the interest went down and the prices went crazy up!
You should post your situation in the mortgage rate thread: official-mortgage-rates-thread-351105/3623/

The brokers there can quote you on what it might look like if you broke your current and went into a new mortgage at a lower rate. You might be surprised at how much money you can save, even taking into account the IRD penalty. Plus, right now many lenders are paying legal, appraisal, and discharge fees for you to come over. I was able to get those covered, plus $4,000 cashback, so I actually came out ahead in cash, not even counting the savings in interest in my new mortgage (although, I was in a variable, so my penalty was only 3-months interest).

Otherwise - since your LOC rate is so low, your plan looks sound to me. Even if you used the entire LOC to pay down the mortgage, you would basically be saving 0.39% interest; just have to have enough cashflow to service the mortgage and LOC payments.
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Oct 12, 2014
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Ajax
I'm in a similar situation right now as OP. I have $385k remaining on my mortgage and about to get approved for $300k HELOC at 2.95%. Right now I need $20k to do a renovation project. Other than that I'm trying to figure out if I should anything else with the HELOC. My household income likely to be close to $200k for next 5 years, so here the two options that I am trying to decide between:

A) Invest in rental property - I have been eyeing some townhouse projects and think its a better investment that pre-con. condo in GTA. Sure I would need to take more money from the HELOC, but generating a positive cash flow seems a bit more promising for townhouse or semi-detached home than pre-con. condo.

B) Invest some of the HELOC to max out RRSP room with dividend earning ETFs, stocks or more TD e-series index funds. I have plenty of RRSP and spousal RRSP room contribution room left and as long as I earn more than 2.95% I should be good. Also added benefits are greater tax refund and more CCB. Once RRSP room is done, I can move on the TFSA and repeat. I'm not sure investing HELOC in non-registered account makes sense for me, since I'm in high tax bracket, but would love to hear feedback if I just start with maxing out the RRSP first.

Thoughts? Appreciate any feedback.
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yellowlight18 wrote: I'm in a similar situation right now as OP. I have $385k remaining on my mortgage and about to get approved for $300k HELOC at 2.95%. Right now I need $20k to do a renovation project. Other than that I'm trying to figure out if I should anything else with the HELOC. My household income likely to be close to $200k for next 5 years, so here the two options that I am trying to decide between:

A) Invest in rental property - I have been eyeing some townhouse projects and think its a better investment that pre-con. condo in GTA. Sure I would need to take more money from the HELOC, but generating a positive cash flow seems a bit more promising for townhouse or semi-detached home than pre-con. condo.

B) Invest some of the HELOC to max out RRSP room with dividend earning ETFs, stocks or more TD e-series index funds. I have plenty of RRSP and spousal RRSP room contribution room left and as long as I earn more than 2.95% I should be good. Also added benefits are greater tax refund and more CCB. Once RRSP room is done, I can move on the TFSA and repeat. I'm not sure investing HELOC in non-registered account makes sense for me, since I'm in high tax bracket, but would love to hear feedback if I just start with maxing out the RRSP first.

Thoughts? Appreciate any feedback.
If your income is going to be 200K than save your income and use that to invest. This way you pay no interest and you have forced financial discipline to make it work.
If you use the HELOC you are paying interest so you need to beat that and if you are going to repay it in a year or two then your taking the risk for only a yearish of gains.
The downsides of using your HELOC is the interest and the need to pay it off no matter what and if you lose some income you are already committed. The downsides of using your income to invest is that you have to wait until you make it. The pros of using your own income is that if it doesn't come through you are not responsible for money fate screwed you out of.
If you borrow and the market drops you are underwater with interest to pay (and some principle) and if your income falls you have a double negative, if you invest with income instead and if the market drops you can wait for recovery with no extra costs or burden on your end.

That said if its going to take many years to repay the HELOC you used to invest then your risk multiplies and expenses happen, perfectly laid plans rarely work out but if you are disciplined for a short period then you can have money that you can lose and not be in debt and if you don't lose it then your laughing.

If you can't repay the HELOC quickly then you are taking a huge risk, if you can then you have little need to take the risk at all.
In fact in Rand McNally they wear hats on their feet and hamburgers eat people
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I've only borrowed money from a financial institution twice in my life, in 1970 first car (used) and paid back within six months. The second time was near thirty years later when my wife and I bought our small bungalow. Were offered a $100,000 LOC from the bank which we accepted but has lain dormant (never used) for over two decades now. Mortgage paid off after house purchase around three years later on lower middle income salaries. No debts since.

I've been investing since the early 80's and I never had a need to leverage our investments. In retirement we're still financial survivors which is a lot more than I can say about other investors I've seen over the decades.
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Oct 12, 2014
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Quentin5 wrote: If your income is going to be 200K than save your income and use that to invest. This way you pay no interest and you have forced financial discipline to make it work.
If you use the HELOC you are paying interest so you need to beat that and if you are going to repay it in a year or two then your taking the risk for only a yearish of gains.
The downsides of using your HELOC is the interest and the need to pay it off no matter what and if you lose some income you are already committed. The downsides of using your income to invest is that you have to wait until you make it. The pros of using your own income is that if it doesn't come through you are not responsible for money fate screwed you out of.
If you borrow and the market drops you are underwater with interest to pay (and some principle) and if your income falls you have a double negative, if you invest with income instead and if the market drops you can wait for recovery with no extra costs or burden on your end.

That said if its going to take many years to repay the HELOC you used to invest then your risk multiplies and expenses happen, perfectly laid plans rarely work out but if you are disciplined for a short period then you can have money that you can lose and not be in debt and if you don't lose it then your laughing.

If you can't repay the HELOC quickly then you are taking a huge risk, if you can then you have little need to take the risk at all.
Waiting till I make the money is tough, since I may be losing out compound interest effects of investing now or buying a property that will appreciate over time.
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Dec 13, 2010
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yellowlight18 wrote: I'm in a similar situation right now as OP. I have $385k remaining on my mortgage and about to get approved for $300k HELOC at 2.95%. Right now I need $20k to do a renovation project. Other than that I'm trying to figure out if I should anything else with the HELOC. My household income likely to be close to $200k for next 5 years, so here the two options that I am trying to decide between:

A) Invest in rental property - I have been eyeing some townhouse projects and think its a better investment that pre-con. condo in GTA. Sure I would need to take more money from the HELOC, but generating a positive cash flow seems a bit more promising for townhouse or semi-detached home than pre-con. condo.

B) Invest some of the HELOC to max out RRSP room with dividend earning ETFs, stocks or more TD e-series index funds. I have plenty of RRSP and spousal RRSP room contribution room left and as long as I earn more than 2.95% I should be good. Also added benefits are greater tax refund and more CCB. Once RRSP room is done, I can move on the TFSA and repeat. I'm not sure investing HELOC in non-registered account makes sense for me, since I'm in high tax bracket, but would love to hear feedback if I just start with maxing out the RRSP first.

Thoughts? Appreciate any feedback.
In my opinion - both options are good, and it's more about whether you want to invest in real estate or in the stock market.

Going the route of the rental property would allow you to deduct the expenses and rental property mortgage against your taxes. But it does concentrate you further into real estate, and you have to be a landlord (even if you hire a management company to handle things for you).

Borrowing from your HELOC to invest in your RRSP or TFSA can certainly work (I've just refinanced to max out my TFSA), as long as you have the cashflow to service the loan - which sounds like you would no problem. This is just regular borrowing, as you cannot deduct the interest. Both the RRSP and TFSA are excellent vehicles for investing - for flexibility and psychology, you might want to max out the TFSA first. It is true that the TFSA and RRSP get you the same result at the end when looking at your after-tax contributions; but most people forget that part of the money inside the RRSP is actually the governments tax deferral. You do receive this tax deferral money to use today, but it comes to you outside of the RRSP, in the form of a tax refund at the end of the year. People tend to forget that they've received this money to use today, and then cringe when they pay RRSP taxes at withdrawal many years later.
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yellowlight18 wrote: Waiting till I make the money is tough, since I may be losing out compound interest effects of investing now or buying a property that will appreciate over time.
How long of a wait are we talking here, how much of your income can you use to repay your loan?
In fact in Rand McNally they wear hats on their feet and hamburgers eat people
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Jan 14, 2010
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yellowlight18 wrote: Right now I need $20k to do a renovation project. My household income likely to be close to $200k for next 5 years. Thoughts? Appreciate any feedback.
Sorry, but you asked... how can you need to borrow $20k on that income stream? I feel like that's a house-poor scenario, which doesn't fit the suggested 'rules' of safely borrowing to invest.
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Redsanta wrote: Or lose 20% due to correction
when was the last time this happened
Covid march last year?
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gogoblender wrote: when was the last time this happened
Covid march last year?
2008-9?
Sep-Dec 2018?

Heck...some tech stocks lost 20-30% between Feb-Mar 2021
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charliebrown wrote:

Heck...some tech stocks lost 20-30% between Feb-Mar 2021
After this
stock market good now, year later?
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Stryker wrote: I've only borrowed money from a financial institution twice in my life, in 1970 first car (used) and paid back within six months. The second time was near thirty years later when my wife and I bought our small bungalow. Were offered a $100,000 LOC from the bank which we accepted but has lain dormant (never used) for over two decades now. Mortgage paid off after house purchase around three years later on lower middle income salaries. No debts since.

I've been investing since the early 80's and I never had a need to leverage our investments. In retirement we're still financial survivors which is a lot more than I can say about other investors I've seen over the decades.
I totally agree with your way of investing (my folks have been the same way), though I can certainly see the benefits of using leverage to your advantage. Although I have a HELOC available to me now, I'm 99.999% sure if I executed any of these plans to borrow & invest I'd probably get zero hours of sleep a night Face With Tears Of Joy
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gogoblender wrote: After this
stock market good now, year later?
No pain go gain ;)

Some stocks haven’t recovered to their pre-2020 levels, others are at all-time highs. If you got margin called or panicked sold in March 2020...then too bad so sad

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