For many people, the majority of their assets are locked into their family home. This follows the traditional advice many of us have received over our lives. It’s better to own than rent. One day you’ll pay off that mortgage and you’ll be free.
Below is an image of the traditional mortgage path. The red part represents the outstanding mortgage. The green part represents the equity in your home achieved by your mortgage payments and the increased value of your home.
Overtime, usually 25+ years, you’ll pay off your mortgage and your house will be worth a significant amount more than what you bought it for. Unfortunately, the increased value of your home does not translate into any income. In addition, the increased value of your home is only accessed when you sell your home and move into an old folks home. In my opinion, that’s too late to enjoy and reap the benefits from years of hard work.
While safe, traditional advice on home ownership can lengthen your journey to financial independence(FI). After reading the book, The Value of Debt, I’ve decided to take on some additional risk by unlocking my home equity to invest.
Robert Kiyosaki said it best, In today’s rapidly changing world, the people who are not taking risk are the risk takers.
We’ve built up a lot of equity in our house. But it isn’t doing anything. Our mortgage payments remain constant for the next 15 years until we pay off the house. At that point, the benefit is having no mortgage payment for the rest of my life. But is that a good deal?
I like to use home equity in my personal net worth calculation but it doesn’t produce any income. A common FI calculation is that you need 25 times your annual expenses in assets. But like Robert Kiyosaki says, “your house is not an asset because it doesn’t put any money into your pocket.” Which makes it a liability as it only takes money out of your pocket.
How can you turn your house into an income producing asset?
It doesn’t matter how much equity you have in your home, the value of your home should continue to rise regardless.
What’s the obsession with paying off your mortgage?
My obsession with paying off my mortgage stems from my parents. Growing up, the message I got about debt is that it’s bad, very bad.
My 5 year fixed term mortgage renewed this past January and the interest rate doubled. Thankfully, this didn’t affect us that much because our home is relatively small compared to the national average.
Keeping the mortgage low, allows us to ride through these high inflationary times with relative ease. That being said, there is a whole bunch of equity that is inside our home that isn’t producing anything.
How can you unlock the equity in your home?
Most people borrow money. We borrow money to buy homes, cars, vacations, home renovations, and to use for emergencies. In Canada, when you borrow money to buy things (cars, vacations, clothes, fancy dinners, etc), the interest payments that you make are with after tax dollars.
After tax dollars is the money that ends up in your bank account. Unfortunately for many, a significant portion of their after tax income is spent on interest payments. But this is what our society has told us to do. Borrow money so you can buy liabilities and experiences now.
When companies borrow money to buy things, the interest payments can be deducted from earnings. This results in a lower tax bill.
Individual tax payers don’t have that option. Borrowing money to buy things you can’t deduct from your income is a recipe for staying in the rat race. Not only are you paying non-deductible interest, you are paying back the interest with after-tax dollars (see image below).
A significant portion of a person’s income is paid in taxes. This is a fact of life and isn’t going to change anytime soon. Employment income is taxed at the highest rate.
After you pay all your taxes to the government, you get to keep the rest. This can be called take home earnings, net income, or after tax earnings. Your after tax income is then used to pay for all your liabilities and expenses.
But borrowing money from your home equity to invest has a few key advantages!
You can deduct interest payments from your income. It works the same as RRSP deductions.
What will I invest in?
I’m going to invest 85% of the HELOC in iShares All Country World Ex Canada (XAW)(MER-0.22%). The other 15% is going to be invested in Vanguard Canadian All Cap Index (VCN)(MER-0.05%). These investments will be held in a taxable account so all dividends and capital gains will be taxed.
| XAW | VCN | Total | |
| Target Allocation | 85% | 15% | 100% |
| Date: December 2023 | $10,487 | $1996 | $12 483 |
Like pretty much everything in this world, the decision has to work for you. The reason I’m using two funds is to encourage me to keep the 85/15 allocation. An all in one fund like VEQT or XEQT would work too but they are both too concentrated in Canadian stocks for me.
What is the cost to borrow from my HELOC?
My HELOC rate is the prime interest rate plus 0.85%. I’m going to update the table below as I borrow more fund to invest.
| Date | Borrowed Funds | Interest Rate | Total Interest Paid |
| Dec 19 | $12 000 | 8.2% | $90.85 |
Total Loss/Gain
$12 483 – $12 000 – $90.85 = $392.15
What’s My Plan?
I’m slowly borrowing from my HELOC to invest. If at any point there is a significant decline in stock prices, I will increase contributions.
I will use the tax refund to pay down my mortgage.
Dividends from XAW and VCN will be used to pay down my mortgage.
What could go wrong?
Well, the market could crumble, my house could decrease in value and my HELOC lender may call in the loan causing me to lose tens of thousands of dollars. But I’m semi-confident that it will work. I’m starting off slowly by contributing about $1000/month. I’ll continue to update this post so readers can see how much I’ve lost or hopefully gained.
Conclusion
This blog is not for financial advice. I’m using my HELOC to invest as an experiment. It’s probably a better idea for me to max out my contributions to my TFSA before I begin exploring leveraged investing. But that will take too long. I want to learn now. Wish me luck!