Make the most of the equity in your home
In the 1980s, my parents’ primary financial ambition was to pay off their mortgage as quickly as possible. Like many of their peers, their strategy was to ensure that, come the age of 40, they may be able to afford a cottage, a sporty car, or their children’s post-secondary education. They figured (rightly so) that once that main debt was erased, they would become financially independent and free to spend their money on enjoyable things.
Thirty years ago, such goals were much more viable than today. Typically, the mortgage on our parents’ homes was approximately double to triple ONE person’s annual gross income. That ratio has grown exponentially over time, leaving this generation with mortgages that are six times (or more) ONE person’s salary. This spring, the average Canadian house price was $375,000, while the average annual salary was $44,000 – making average house prices 8.5 times greater than the average salary!
So I ask the question: are we struggling towards financial freedom that is at least six times harder to attain, and expecting to achieve it in the same timeframe as our parents? It would appear that our dream is outdated. It may be time to reconsider our modus operandi?
Should you use the equity in your home?
If over the years you have managed to pay down a chunk of your mortgage, why not use that equity towards other savvy investments you feel would pay significant dividends in the long-run, such as a rental property. Perhaps you would like to borrow against your healthy equity to purchase a cottage to enjoy the outdoors with your family for years to come.
By no means am I encouraging you to over-extend yourself financially to the point where money becomes stress, where you become house-poor, or get into trouble once interest rates rise? Quite the contrary, I believe it is wisest to spend conservatively and invest only once risks have been calculated and worst-case scenarios have been explored. I am simply suggesting that if you wait until your mortgage is fully paid off before you begin to live your life, it may be too late. Do you really want to buy that cottage at 60 years of age? What happened to the 30+ years you could have been enjoying your investment? It is necessary to plan for the future, but not to the complete sacrifice of the present. However, keep in mind that the key factor to success is established financial stability. If you continue to live paycheck to paycheck, this approach is not appropriate.
And if you do find yourself stuck in a big house with a matching big mortgage, and unable to accumulate equity; if you have nowhere to go and nothing to do (because you cannot afford the extras); if the thought of your debt weighs on your mind constantly, maybe you should consider downsizing. Living in a smaller home allows for extra cash to spend on outings, vacations, education, and all the other extras. It all comes down to priorities. Do you want to live in a big house or do you want to maintain a more modest dwelling while taking full advantage of what life has to offer?