Credit card debt, student loans, mortgage payments — if the word “debt” makes you feel a bit uneasy, you’re not alone. But debt doesn’t have to be a bad thing. In fact, if you’re a homeowner, it’s possible to leverage your equity to secure a better financial future for yourself and your family.
The good news is, this opportunity isn’t limited to those who have paid off their home in full — as long as you have some equity, you’re able to borrow* against what you’ve paid off, up to a certain percentage. The loan amount depends on the type of mortgage you hold, so be sure to consult a lending specialist. Once you’ve secured your loan, you can use it to further your net worth by investing it in the market, using it as a down payment for an investment property, or even using it as an RRSP contribution.
However, this type of investing isn’t for everyone. “Anytime you’re considering leveraged investing, you need to sit down with a registered financial advisor,” says Maxine Gromnisky, Branch Manager of Linden Ridge at SCU. “Determining whether this is the right move truly depends on the individual or couple’s situation, their spending habits, and tolerance for risk. It should always be part of a bigger financial plan.”
Making your mortgage work for you
A key benefit of leveraging your mortgage is being able to invest a larger amount all at once, rather than investing your money incrementally each year. “It’s not about timing the market, it’s about time in the market,” says Gromnisky. “By investing a lump sum, you maximize its potential for exponential growth over the long term.”
Leveraged investing also may have tax benefits, such as writing off some of the interest you’ve accrued, or, if you’re contributing the funds towards your RRSP, getting a larger tax refund. While it’s not a typical solution, Gromnisky suggests an RRSP contribution can be a great way to play catch-up if you’re approaching retirement age and not quite where you want to be in terms of your savings and recommends to consult with an accountant or tax experts.
“Let’s say you paid off your house instead of contributing to your RRSP, and now you only have 10 years to build a nest egg,” says Gromnisky. “If you have unused RRSP contributions, you can use that equity in your home and make it work for you, either by putting it into your RRSP or an investment as a leveraged investing piece.” If you do put it into your RRSP, you’ll most likely get a refund come tax time, which you can either use to pay back what you borrowed or contribute to a Tax-Free Savings Account (TFSA).
When in doubt, talk to an advisor
Regardless of how you choose to invest, there may be clear financial benefits to leveraging your mortgage. However, it’s important to remember that you’re taking on debt to go into a market-based investment product — so there will always be risk attached. Prior to leveraging your mortgage you need to make sure that you consider all of the ramifications. Does the extra payment fit within your budget? Do you have a plan in place for paying it off?
To set yourself up for success, Gromnisky recommends working with an advisor with experience in leveraged investing. By asking questions that gauge your spending habits and risk tolerance, they can guide you towards the money moves that make the most sense for your unique situation.