Not your Parents Mortgage
Not your Parents Mortgage
In the times of tape decks and Sony Trinitron TVs, mortgages were almost like a dirty word. A thing born out of necessity, mortgages were vanilla-plain and meant to be paid off quickly and at all costs.
Our parents saw interest rates sitting around 12% in the 80s (peaking as high as 20%) and around 8% in the 90s which would’ve meant payments big enough to become a source of fear for many. To illustrate, a $100,000 mortgage with an interest rate of 12% would be approximately $1050/month, at today’s interest rates that same payment would give you more than twice the amount of mortgage dollars. (Fun fact - some of the online mortgage calculators I searched won’t even calculate a payment at 12% as they are capped at 10%).
So what is the point of this diatribe? Simply that our parents come from a generation that is likely to have a very different view on credit, but it’s important to keep perspective and remember that not all debt is bad. We’ve seen property values in BC significantly rise over the last 15 years paired with historically low borrowing rates, so you don’t need to be afraid to leverage your home equity – with a big qualifier here: when and where it makes sense.
For example, using your equity to purchase that investment property you’ve been dreaming of may be a great idea. Provided that it fits into your budget and you’ve got a good fall back plan in place, the investment property will provide a stream of income and is likely to appreciate in value over time thereby contributing to your net worth.
Maybe you want to use that equity to complete your Master’s degree. You know that getting this designation will directly translate to a pay raise and significant future opportunities which is an investment in yourself and has a measurable rate of return. Or maybe the equity is going to send your oldest daughter to medical school which has an intrinsic value of its own.
Perhaps you’re coming off a major surgery or injury that impacted your income for a time and caused the household to run up a lot of debt. This may also be a situation where you can leverage equity to consolidate and pay down high-interest debts to get your cash flow on point so you can start saving and building wealth again.
The naysayers will tell you that you shouldn’t use your home as an ATM and while I firmly agree with that, it’s important to distinguish between using your home as a bank machine and leveraging the biggest asset you own which also gives you access to the lowest rate of borrowing. However, when considering a refinance, ask yourself what future value you are getting by dipping into these funds.
And beware of the never-never plan. If you find yourself refinancing every few years to consolidate debt then it might be symptomatic of a cash flow shortfall, which won’t resolve itself until you put together a budget and really determine what’s affordable for you. In some cases, this can reveal the need to take on another job, cut down on household expenses or even possibly consider downsizing to a more manageable mortgage because you don’t want to be hustling to make mortgage payments at eighty when you should be road-tripping to Reno in a custom Cadillac with your blue-haired besties. Do you know what I’m saying?
Questions? Let’s chat.