Posted by: AdminS
My Client’s Fatherly Advice
I will never forget the great advice a client of mine told his daughter and future son-in-law. They had been married for a year and I was helping to arrange their home loan. The young couple were first time home buyers and were accompanied by my client to sign their mortgage papers (the dad was there more for moral support).
The newlyweds were excited about the prospect of buying new furniture, BBQ set, etc. for their new home and were already asking me questions about the possibility of adding a line of credit to their mortgage. You can tell that the father was getting nervous. As I was gently steering them away from the idea of adding a line of credit to their property, which already had a loan to value of around 85%, you could tell that the concept of paying down their mortgage was not a priority. In fact, caught up in a world of their own, they talked about using the line of credit (which they didn’t even have) to take a trip to Hawaii as a “gift” to celebrate the purchase of their first home. The trip was a great short term treat, but how they were taking it would was the first step to a world of spiralling debt.
You could tell that their dad could no longer just sit there and smile, and so he jumped in and asked his daughter and son-in-law a simple question, “Who do you think owns your home?” Puzzled, they looked at me and I smiled knowing full well where their dad was going with the answer. Before I could even attempt to add my two cents he jumped in and said, “You don’t, the bank owns your home”.
Unfortunately, as a Mortgage Broker, we indeed do receive many calls from people who have innocently spent beyond their means and now find themselves in a vicious cycle of debt. A mortgage is a tool that will help you purchase your home and if it is used properly can be used as wealth creation vehicle too, especially as the value of your home typically increases over the long term. Some simple mortgage strategies you can use to create wealth include:
Making your mortgage tax deductible by selling your equities, using the funds to pay down your mortgage, then pulling the funds out of your mortgage again to re-purchase those equities (i.e.,
stocks, mutual funds, etc.
Using the equity built in your home to purchase your first investment property
Using any additional funds (raises, year-end bonuses, gifts, Tax returns) to pay down your mortgage vs. purchasing RRSPs or taking a lavish vacation (consider some stay-cation ideas!)
Dad’s Best Advice
Remember who really owns your home (…love that line). Once you understand this, then remember to revisit your mortgage strategy yearly to ensure that it is helping to create wealth for you and not your bank.
Owning your home is a great way for you to build wealth so have a mortgage strategy that first focuses on paying your mortgage and other “bad debts” down quickly and second leverages your home equity to invest in areas that are right for you or “good debt”. Don’t get caught up in a cycle of using your home equity as credit card where you struggle to meet your monthly payments or get caught making interest-only payments; remember, this will eventually catch up with you and you could find yourself come mortgage renewal time with a home loan that exceeds the value of your property.
I have got to give some credit to my own dad who used to say, “Manage your cents because the dollars manage themselves“.