Thoughts and hearts are turning toward the Holiday and that special time with family and friends. In the spirit of the Christmas season, there are many of you who could use some good news regarding your mortgage. In today’s extreme low rate environment there is an often overlooked opportunity to become mortgage free many Christmases earlier and have that spendable income available for more jolly purposes.
On The First Day Of Christmas – Gift of Equity
We have just finished experiencing the greatest real estate market appreciation period in the last 100 years. If a monkey owned a home in Toronto over the last ten years, they would have enjoyed a conservative 100% price appreciation. This is a basic doubling of your home’s value. It is important to note that we did nothing special to make this happen. In fact, if property values were to drop in a U.S. style home meltdown of 25-50%, this same monkey could do nothing to stop it. Or can he. Statistics show the average Canadian home is 70% paid off. That equity is a gift horse to those who would seize the moment.
Super Low Interest Rates – The 2nd Day
We have become quite accustomed to historically low interest rates on mortgage debt. But a surprising amount of Canadians have not used this to their advantage. We still think that paying off a mortgage at 2.99% as quick as possible is more important than investing. Our priorities have become skewed. As long as our Federal government continues to follow the monetary policy of our neighbors to the south, we will have low interest rates for the foreseeable future. This will hurt the person who desires to pay off their mortgage quickly as you are allocating hard earned, after tax dollars toward a debt that is serviced at a very low interest rate. If you were to consider taking a portion of your equity and investing it in a safe asset backed vehicle that produces 8-15% annually, the spread would make you look like a genius in time. Let’s have our friend Joseph show us how it’s done:
Joe walked into my office with a question. How can I get closer to my investing goals? I quickly showed Joe that he was our typical Canadian with a 400K home that was paid down to 100K with a minimal RSP and no other investable assets. His mortgage was at a low 3% and he had very little other debt. Explaining to Joe that he was sitting on a lazy asset (his home) was quite simple and after taking the time to educate him on the benefits of prudent borrowing to invest, Joe started to get excited. Here’s how it looks: We borrowed another 150K which was still a very conservative mortgage of less than 65% of the value of the home. The cost to service the increased debt was $700/month. We immediately invested the funds into an asset backed investment that provided an annualized return of 12% or $1,500/month. The difference of $9,600 annually is reinvested and compounded to increase the overall return. With the rule of 72 on hand I was able to show Joe that his initial investment would double in 6 years to 300K. If he wanted the investment to pay the extra $700 each month, then he would still have 223.5K or an net profit of 73.5K. This is like getting a twelve thousand dollar raise for the next six years! Yes, our 2nd day of Christmas can be a raise – and you don’t have to ask the boss for this one.
On The Third Day – Time To Make Changes
This is not the most exciting gift that I can think of. Yet there is no worse feeling in the world than missing out on a golden opportunity. With property values flattening in most major Canadian real estate markets, the writing is on the wall. Appreciation is last decade’s fad and one not to be repeated for a long time. The collective consciousness of those who are reading the writing is: now is the time to make changes in their investment decisions. You never want to feel like the monkey who saw their property value drop even 25% and realize that your ability to borrow your equity just got taken away by something you can’t control. Using Joe’s example above – his 400K home would be worth 300K. At a 65% LTV, he would only be able to borrow a maximum 95K versus the 150K earlier. The difference in returns is greatly affected here. His 73.5K return just became a maximum 45K or a difference of almost $30,000. I know this is not something I would like to know I have lost out on!
The Holiday Season is a time to reflect on the year that has passed and make a resolution to make the next one better. The three gifts I give to you this Christmas are Equity, Low Interest Rates, and a Limited Time. With these gifts in hand, you are going to have the best 2013 possible. If you resolve to do something with it. Make the move and reach out to me below so we can provide you with a complimentary report on how you will benefit from my Christmas gift to you. From all of us here at Mortgage Truth, a wonderful break with your loved ones and a most prosperous New Year!