Using Home Equity

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

I really don’t like debt. If all goes well, my wife and I should have our mortgage paid off next year. While I understand the merits of leverage and can see how home equity loans would boost savings and increase cash flow every month, it’s really just not for me. I can also see investing in higher-returning stocks instead of paying off a mortgage which is costing a much lower interest rate.

My wife and I are attacking our mortgage debt in order to reduce the amount of money we need monthly to live off of. The mortgage is, by far, our largest monthly expense. Once we are rid of that debt, our monthly fixed expenses will drop to around half of what they are now. To us, the increased cash coming in per month will allow us to build our investments over the next 10 years or so to the point that the cash-flow from the investments will replace our required income.

Next year, I will be 34 and my wife will be 31. Given the amount of time we have available to invest before our goal of being financially independent by the time we’re 45, there is more than an outside chance that we won’t have enough money saved to retire. I would prefer to be working towards one financial goal and building towards it.

We are planning to use some of the equity in our home to invest in retirement, just much later in the game. We aren’t really anchored to the city we live in at all, and are hoping to move somewhere much cheaper and take the equity and gains to top up our retirement fund. If we’re able to move somewhere that costs 50% less, the leftover cash from our house could make up around 20% of our retirement fund.

The way my wife and I look at our finances is that we would rather be closer to financial freedom and have less debt hanging over us, even if it’s “covered” by investment returns. For the amount of time it will have taken us to pay off our house, the opportunity cost from not investing isn’t really a big deal (the interest rate spread between the interest rate we’re paying on our mortgage and what we could have earned over the 5-year period) – especially when you look at the risk-adjusted rate.

For our peace of mind, and our method of achieving financial independence being debt free is very important. What are your thoughts on debt? Are you comfortable buying stocks on credit? Do you wish you could get more cheap credit to buy stocks?

4 thoughts on “Using Home Equity”

  1. Buying stocks on credit does not sound like a smart thing to do. You are leveraging something that could potentially be worthless (if the company goes under) for a chance it may appreciate while paying interest to a a lender.

  2. Good Topic Dave, I remember this one from our previous talk.

    Well here’s the thing, finding the right balance with the companies you invest in, and that have been around for 50 – 100 years. Invest for the dividends.

    If you make 8% dividend and are paying 3% interest, then you are ahead by 3% still after a 2% inflation factor. Plus then the interest is a tax deduction, unless you have this within your TFSA account.

    It all depends on what your strategy is to get you there. Different people like to do things differently, and it is a learning process for sure.

    I am comfortable with buying stocks on credit, and yes, wish I could get more cheap credit to buy more stocks.

  3. I would not be able to sleep if I used borrowed money to invest. It sounds like a terrible idea especially for someone, like me, in their 40s who is running out of years to recoup loss.

    I have entertained the thought of a reverse mortgage when I am 60 to tide me over until I am 65 so I can retire early but I would put it in GICs or other boring guaranteed investments. I would consider the reverse mortgage to be selling a portion of an asset.

  4. The closest I ever came to using borrowed money or home equity to invest was in an indirect fashion. As I was accumulating wealth in the 1990s (I was still working full-time), I chose to use some of it to invest in mutual funds instead of making extra payments on the mortgage. This turned out to be a good move because the market in the booming 1990s was so good that I was able to use a lot of the gains to pay off the mortgage anyway, followed by quickly replenishing those holdings with all the excess cash I had after my monthly expenses dropped so much.

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