The Wright Sisters Group | Union Realty Brokerage Inc. - The Beaches, Leslieville, Riverdale and East York Real Estate Specialists – Your East End Toronto Real Estate Team

Wondering how to make the most of your home equity?

15 January 2019
LINDSAY WRIGHT

With average home prices in Toronto increasing an average of 8.5% per year over the past 5 years (and 7.6% per year over the past 10 years)*, this may be an ideal time to explore how you can take advantage of your existing property’s value to help create wealth.

While many people may view a mortgage simply as debt, if structured properly, it can also unlock significant opportunities.  In fact, when compared to other types of lending, home-secured borrowing (a mortgage or home line of credit) is a less expensive option that can leverage your home and make strong return on investment.  In fact, for someone with good credit, home-secured borrowing is typically three to four percent less than the cost of borrowing from a personal line of credit.

Here are some mortgage/wealth strategies you can employ:

The Home Renovation Strategy:

This is a great time to make the home improvement you’ve been dreaming of, or perhaps a renovation to maximize the sale price of your home.  For pure return on investment, consult your realtor to determine what renovations would most effectively raise your home value within what the market will pay.

Here’s an example of how you can save:  A $50,000 loan through a home line of credit, amortized over 10 years, creates a savings of more than $10,000 in interest compared to borrowing from a personal line of credit.

The RRSP Strategy:

For tax savings, an effective strategy can be unlocking part of your home’s value to invest in RRSPs.  If you’re having a good year from an income perspective, you can use home-secured borrowing to top-up your RRSP contribution and lower your income tax.

Example: If you make $80,000 a year, your marginal tax is approximately 31.5 percent.  With a $20,000 after tax RRSP investment, you would be eligible for an approximate $6,300 tax refund.

The investment strategy:

You also have an opportunity to leverage your home equity to purchase an investment property or income-generating stock.  Your interest on that portion of your mortgage is tax deductible meaning you pay a fraction of the interest.

Example: On a $200,000 investment, your annual interest in the first year is $7,000 (based on a 3.5% mortgage component).  If your marginal tax rate is 31.5% your tax deduction would be $2,200, meaning a true cost of borrowing of approximately 2.4 percent.  If you were able to earn an annualized rate of return in the 5%, 7% or 10% percent investment return (wouldn’t that be nice!), this offers a significant opportunity to build wealth.

Developing a borrowing plan

A borrowing plan provides an opportunity to compare rates and other advantages between your lender and other providers.  Variable rate discounts, for instance, are still very attractive and may present an option to refinance into a better rate as you draw new funds.

If you already have a great rate, a second mortgage with the same or a different lender can create a short term two-mortgage structure, later consolidating into one when you reach your renewal period for your original mortgage but that will take advantage of the opportunity now.

Today’s real estate market growth provides homeowners with many options to take full advantage of their equity.  This is a great time to consult a professional to determine what is best for you.

*Note: average Toronto home price growth is sourced form the Toronto Real Estate Board (TREB) and includes all property types (detached, semi-detached,town-homes, condos, etc.) for all TREB territories.  Please contact your Union Realty real estate agent for customized figures for your property type and location.

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To learn more, or to secure current mortgage/home-secured lending options and analysis, please contact Outline® Financial at hello@outline.ca.

Outline® Financial is on of the top-rated mortgage and insurance companies in Canada offering a host of rate and product solutions from numerous banks, credit unions, mono-line lenders, and insurers all in one convenient service.  Outline® was formed by senior level bankers and financial planners that wanted to offer their clients choice with an exceptional service experience.