News from Canada's Mortgage Experts

Working as a Mortgage Agent for the past 15 years, I have seen too many consumers use their home as credit cards or an ATM machine to purchase things that they cannot afford, rather than using it to generate more wealth.

My Client’s Fatherly Advice

I will never forget the great line 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. They were first time home buyers and the three of the came in 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 can tell that their dad could no longer just sit there and smile, 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 but before I could even attempt to add my two cents he jumped in and said, “You don’t, the bank owns your home”.

Use Your Mortgage to Build Wealth Not to Support a Lifestyle

Sadly, as a Mortgage Broker, we get too many calls from people who started this way 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 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, yearend bonuses, gifts) to pay down your mortgage vs. purchasing RRSPs (over 7% rate of return GUARANTEED!!)

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 “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, 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.

As my dad used to say, "Manage your cents because the dollars manage themselves".