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 It would appear that our dream is outdated.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?
Comments
I totally agree with your suggested approach. In the 1960’s, my parents lived to ”pay off the mortgage” as quickly as possible so that they could ”enjoy life” in their 40’s. Unfortunately, he suffered a terrible work accident at the age of 39 and never got to enjoy the life he had so carefully planned. In my case, a divorce in my mid-40’s with less than $20K left to pay on the mortgage had me starting over with a new mortgage which I can only hope to pay off by my early 60’s. All this to say that you never know what life will bring; very little happens as planned. I agree that if you’re not already living pay cheque to pay cheque, you should not sacrifice the present.
So true that life rarely happens as planned. Thanks for sharing your story.
We’re not too worried about paying off our mortgage as fast as possible… however, we do pay an accelerated rate, put down lump sum payments, and bump up our payments whenever we have the extra money. We have 7 years left on the mortgage on our rental (have owned it for 9 years), and 19 years left on the mortgage on our current home (have owned it for 3 years).
I’d like to pay each of them off in 15yrs of less… but I also want to live life, take vacations, and enjoy the little extras.
I don’t know if I am just old fashioned, but much like my parents, I spent 15 years, from 25 to 40 years of age, focused on paying off my mortgage. Now, at 47, I am thrilled that this financial burden is behind me, enabling me to channel a significant chunk of my savings towards the education of my two children, while keeping a nice nest egg for yearly trips abroad. I don’t know that the idea of paying off a mortgage as soon as possible is outdated. Doing so should indeed always be in balance with other key priorities in life, including “living”. Having said this, perhaps what should be reconsidered is the size of houses that we purchase. I am the first to have been guilty of this, wanting in my thirties to have the big house and all that comes with it. Perhaps too many of us get seduced by a lifestyle that exceeds our means. While it is true that average salaries have not kept up with rising housing prices, it may also be true that baby boomers and gen x (and y) have lost a bit of the sense of living within one’s means. The financial crises of 2008 (and beyond), notably in the US, and the ensuing number of foreclosures, certainly offers pause for reflection on whether our parents didn’t in fact have it right: living within your means is timeless wisdom.
Caroline, thanks for weighing in. This is exactly the type of discussion I was hoping the article would spark. I love your last statement: “living within your means is timeless wisdom.”
You’re absolutely right. TO a lot of people, their big house is no longer an asset but a liability, because they’re chained to it, making hefty payments each month for 20 years.
I especially agree with the option to use equity for a rental property. It’s one of those investments that continues to give back if you do it right. Using the equity to purchase a rental should generate a healthy monthly income after the mortgage payment and expenses. That money can then be put toward other investments that will also generate more wealth. Again, you have to do it right, but it’s a great formula for investment success.
To piggy back on Tom’s comment, I would add that “doing it right” means working with a company that can really help you leverage the opportunity by finding the income property for you, filling it with the right tenants, managing it for the length of ownership, and even assuring rental stream for a given period of time. It’s the ultimate in passive investments.
Any examples of such companies to look them up and what they are about?
Hi Jen, very interesting article and I’ll add my point of view.We are all in the rat race. Were trying to achieve some goals,and when we achieve them we want more and get into more debt.And our goals are not economic or logical – they are purely emotional.
Think about it – Instead of buying a new huge house, buy a small one. Invest the rest of the money on financial assets and investments – such that will give you monthly income. Then you have more money coming it. Invest in assets and not in liabilities.
Unfortunately, that not how most of the people act… and the result is lack of money until your last day.
I always did and still believe that real estate is a good investment. In the past few decades, even with the downfall of many world economies, real estate has still been booming in many countries. In Canada for example, home sales are booming with many home owners realizing that they have equity in their homes and are using it to their advantage which allows them to sell their home and buy something a little cheaper, leaving them with a lump sum of cash in their possession when they net the sale.