First off, this isn’t an April Fool’s joke.
Secondly, this isn’t the start of me providing you with really bad advice. I will not be following this up with comments about how car insurance is for suckers, or suggesting an all cheeseburger diet. (Mental note – drive to get cheeseburgers this afternoon, then renew car insurance.)
I’m serious when I say you should always have a mortgage. Which is a pretty bold statement given that being mortgage free is one of the biggest financial goals for lots of people.
Let’s start by talking about debt, which is certainly timely given all the conversation about the federal budget.
There is good debt and there is bad debt.
Bad debt is money you owe that costs you even more money.
Good debt is money you owe that is making you more money than the cost of borrowing.
A mortgage is debt. Whether it is good debt or bad debt depends on what you do with that money.
Many home buyers don’t have the funds to purchase a home outright. With prices rising over the last number of years, the average downpayment on a home seems to be less than 20% in the majority of cases and 10% or less in a lot of cases.
For most people, having a mortgage or not having a mortgage isn’t a choice when they buy.
In my work as a Realtor, I have, however, had a number of clients who were in a position where they had the funds available to pay for a property outright. Whether these funds came from savings or the sale of a higher priced property, it is wonderful to have the option of buying a property and not needing a mortgage.
I say it’s wonderful to have that option, whereas many people say it’s wonderful to not have a mortgage. Typically, people say it’s wonderful because you don’t have to worry about:
- mortgage payments coming out of your bank account
- interest rates going up
- your situation changing and you owing a lender a bunch of money
- getting stuck with mortgage breakage fees if you decide to sell sooner
So if being mortgage free is so wonderful, why do I say you should always have a mortgage? Three simple reasons.
- Mortgage rates are super low.
Mortgage rates right now (April, 2016) are pretty much as low as we have seen them in Canada. They may have briefly been lower a couple of years ago, but we are within a very small margin of those historic lows. There are currently a number of options out there for a 5 year mortgage term for under 2.5%. On the home line of credit front, there are lots of them available at prime plus 0.5%, which puts them at 3.2% interest.
- Interest on money you borrow to invest is tax deductible.
The government of Canada wants to encourage investment. As such, when you borrow money to invest, that interest becomes tax deductible. That means you can lower your taxable income by how much interest you paid on that investment.
The practical effect of this is that it lowers the return you need to achieve in order to turn bad debt (a mortgage or line of credit that costs more money than you make with that money) into good debt.
- The easiest and cheapest way to borrow money is when it is secured by an asset like property.
When life situations change and people need to borrow money, it can get very expensive, very quickly. If you need funds when the stock market is in a down cycle, cashing out those investments can wipe out lots of profit made in your portfolio up until that point. Unsecured lines of credit or credit cards can be quite costly in terms of interest rates. Depending on credit scores, unsecured LOCs can charge 12% interest and credit cards can be up at the 20% rate. While having good credit makes those far cheaper, it is often the case that when you most need funds quickly it is because of circumstances that have impacted your credit.
When buying a property, adding a mortgage or line of credit into the process typically costs less than $150 in legal fees. Doing it at a later point can add $500 to $1,000 in legal fees for both sides.
Let’s do some quick math on what a mortgage costs these days.
If we look at the purchase of a $800K property, a 20% down mortgage would avoid high ratio (CMHC) mortgage insurance premiums and would leave $640,000 available for investments.
At a mortgage rate of 2.49%, that $640,000 would cost a little over $15,000 in interest in the first year. Over the 5 year term, it would cost just over $73,000 in interest. Depending on your tax bracket, claiming that $15K a year in interest would save you $5,000 to $7,000 in taxes. If you tell your financial advisor they have $640K to invest on your behalf and you need it to make more than $8,000 to $10,000 per year (interest cost after tax savings), I think they would likely have a number of options for you to consider.
A line of credit, with no obligation to use it unless you need it or it makes sense (good debt rather than bad debt) is another option and is a fantastic resource to have available.
Of course, the question of what you do with the funds from the mortgage or the line of credit is a complicated one, and I happily leave that in the hands of professional financial advisors. Your situation, risk tolerance, goals and investing experience all play into what should be done with the funds.
By having a mortgage or line of credit in place, you take advantage of the equity in your home and leave yourself in a position where you have the flexibility to easily, quickly and affordably make use of that equity.
If you or someone you like are considering buying a property and you want someone who understands real estate and real estate financing, I would be thrilled to be responsible for what comes next.
Without communal eating, no human group can hold together.
This short statement has huge implications for how we live. The formal dining room of the past is long gone from the plans of modern condos and most new builds. Open concept kitchen and dining is very typical, but often the space allocated for the “dining room” isn’t sufficient for more than a small table.
When I look at homes with clients, it is important to acknowledge that without a sufficient space for members of the household to eat together, an ad hoc dining room will be established elsewhere, with all the consequences (spills on the couch, dirty dishes on the living room table) that go with it!