We’re a country swimming in home equity, yet there’s a stigma about actually tapping this wealth.
Home equity lines of credit are widely and avidly used, but there’s often a judgey tone to comments about this trend that suggests HELOC users are living above their means. The same applies to people refinancing their mortgages to borrow additional money for renovations or repayment of high-rate debt. Reverse mortgages have surged in popularity, but the just mentioning of them still generates pained looks from some people.
Yet, the average resale house price is up 48 per cent in the past two years. Helping people maximize this development needs to become a bigger priority in personal finance. Let’s start with a reader who owns a starter home where he lives with his wife and daughter. His question: How best to use the equity the family has built in their home?
This reader said his family is looking at moving to a bigger home in three or four years. Meantime, he’s thinking about using home equity to backfill his household’s total $120,000 in unused contribution room for tax-free savings accounts.
“The TFSA contribution space is large enough that we won’t be able to make it up in just a few years and I hate the thought of missing out on 30 years of tax-free growth (we’re in our early 30s),” he wrote. “However, given the housing market, we’re going to need every penny for a bigger house.”
I really like the idea of backfilling the TFSAs with home equity. Interest on borrowing to contribute to a TFSA would not be tax-deductible, but the investment gain in the account over the long term should easily exceed the average interest rate on the mortgage. Also, this family would diversify its wealth base by having both a house and a maxed-out TFSA.
Now, back to the real world of compromises forced on people by a housing market that gets more expensive by the day. The next house this family buys might be a stretch, financially. Having the most equity possible from their current home could make this purchase more manageable in terms of smaller mortgage payments and a shorter path to mortgage-freedom.
Until now, homeowners had a kind of safety net in making decisions like this. If you took some equity out of your home, you just had to wait for rising house prices to top you back up again. Now, with interest rates set to rise, it’s possible that growth in house prices slows or even stalls. This outlook argues for marshalling all available home equity for that move-up purchase down the road.
ICYMI (In case you missed it) …
Instalment No. 1 of the six-part 2022 Globe and Mail ETF Buyer’s Guide: Canadian equity funds
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Rob’s personal finance reading list
Russia, Ukraine and your natural gas bill
David Frum writes in The Atlantic about how Russia’s invasion of Ukraine could cause energy prices to soar, particularly natural gas. It’s fortunate that we’re closer to the end of winter than the beginning, but higher home heating costs could add to the inflationary burden on household finances in 2022.
Housing and higher rates
A look at how the housing market reacted when interest rates climbed in 2017-18. One big difference between then and now is that inflation today was running at 5.1 per cent in January, compared with a ho-hum 1.7 per cent in January, 2018. There’s more urgency to the interest rate hikes to come.
How to gamble responsibly as an investor
An exploration of the idea of having some “fun money” – a small offshoot of your main investment portfolio that you can use to speculate, trade and engage in other activities that are too risky to rely on for your retirement money.
Best Aeroplan credit cards
I noted in a recent newsletter that a couple of readers had positive things to say about the revamped Aeroplan travel rewards program. Here’s a review of credit cards that offer Aeroplan rewards.
Ask Rob
Q: Here’s a question that I have not seen addressed in any financial columns. What do you do if you’re not satisfied with the financial plan that you received from a fee-based financial adviser? My husband and I recently engaged an adviser to help us guide our retirement planning. This individual was from a well-known company, that is often quoted in financial magazines and newspapers. The intake process of this financial advising company was confusing and not well explained to us. During the four iterations of our planning process, he made mistakes such as ‘forgetting’ that I’m already receiving my defined benefit pension, not including certain financial information such as our existing savings in projections, getting my husband’s anticipated retirement date incorrect, etc. Other than calling the ‘head honcho’ of the company and raising a concern, what alternatives are there?
A: There’s a growing level of interest in pure financial planning, where you pay a fee for a personalized financial plan. But this is the first time someone’s asked me about what to do if the plan you pay for is unsatisfactory. For answers, I consulted planners and others in my Twitter community. Here are the many replies I received.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
Ten ways to help your child be smarter about money
The money-free zone
I saw the other day that Gary Brooker of Procol Harum died and remembered the live version of Conquistador that the band did with the Edmonton Symphony Orchestra in 1971. Also, of course, A Whiter Shade of Pale.
ICYMI
What I’ve been writing about
- Despair about affording a home has this immigrant to Canada wondering what kind of country we’re trying to build
- A godawful year for bond investors is taking shape – here’s what to do about it
- How do your TFSA contributions compare with other Canadians your age?
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Are your parents giving you money? • Why it’s time to stop shaming the renting lifestyle • Is now the right time to buy a house? • Why are young Canadians leaving the cities they love? • Eating in: How COVID has shifted our food spending • Crisis-proof your finances • Can you afford to live downtown? • The cost of kids
- ✔️ The housing file: The housing boom is ripping apart the financial fabric of Canada • Shut out: A well-qualified millennial home seeker throws up his hands after losing multiple bidding wars • Big city housing affordability is over – now what? • She sold her Toronto house to retire somewhere cheaper, but it didn’t work • How young adults and the whole country win with a tougher mortgage stress test for home buyers • Can’t afford your house? It’s likely not your fault
- 📈 Investing: Robo-advisers have grown out of the novelty stage. Here’s help in finding one right for you • Rob Carrick’s 2022 ETF Buyer’s Guide: Best Canadian equity funds • The 2022 Globe and Mail digital broker ranking: Does the zero-commission revolution flip the script on who’s best? • Are these the stock market returns of a lifetime? • On the cusp of retirement and wondering about an ETF that pushes the limits on aggressiveness
- 💰 Your money: The five most important numbers for checking the health of your personal finances • Today’s freakishly low mortgage rates can’t last. What will pandemic home buyers do when they rise? • There’s a cost in money, isolation and family stress when seniors choose to remain in their own private homes • Taking CPP early can cost you $100,000 and limit your long term options • Fleeing the city for the suburbs? Watch out for higher property taxes, more cars and other costs
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob Carrick