Get an outside perspective before you ‘let your house lend a hand’
I continue to hear a familiar commercial (with a catchy jingle!) on the radio where the company is suggesting that you should ‘let your house lend a hand’. Is my house going to help me buy that big screen television I’ve been asking my wife for? Or that Xbox I want to buy (but disguise as a good idea for the family)? I would argue that most Canadians appreciate the fact that their home’s equity value has gone up over the years due to paying down their mortgage and the housing market appreciation. So why would you think that borrowing from this growth is a good idea?
Get the right advice, first and foremost
As a financial planner I would suggest that Canadians should include the expertise of their financial planner and ‘let him or her lend a hand’ with advice prior to taking out equity from your home. I have found many people using the equity to consolidate debt they have elsewhere with high interest credit cards. Generally, consolidating is a wise thing to do. That is, if you don’t continue those spending habits that caused the same need for consolidation in the future.
As we continue to experience a low interest rate environment, it may seem like a no-brainer to borrow money from your home equity and think of the interest due as a small compromise (hey, it’s cheaper than your credit card). You may even think that you will pay it back soon – but how realistic is that? What happens when interest rates eventually do rise? Will that put you further behind? What if the housing market falls for a period of time (remember, we already lived through this and survived not too long ago)? The Canadian government mortgage and borrowing rules might seem hard to handle at times, but these same regulations most likely saved us from most of the negative results we saw south of the border back in 2008.
Justify your actions
So, if you are going to ‘let your house lend a hand’, where is the money that you borrow going to actually ‘lend a hand’? Is it that big screen television or another toy that you feel as though you need or deserve? Just because the borrowing rate may be low, does it justify the action?
If you go ahead and borrow the money, I would suggest that you look at purchases that will increase your net worth in the future; or use the money to upgrade your education – hopefully leading you to a higher-paying job or promotion. However, if you use the money to go on a vacation, will you actually enjoy the trip if you know that you will eventually have to pay all the money back? If you buy something that will depreciate in value over the years, will it make you enjoy the splurge that much more (or less)?
You may think that you could borrow money for non-registered investments (aka leverage) because you know that the interest payable for this type of investment is tax-deductible. It would be great if everything appreciates in value over time, but what would your attitude be if both your home and the investment account go down in value at the same time? Remember the game show “Press your Luck” and the ‘whammies’? Let’s call this a double whammy!
Discuss with your family
I always encourage conversations with family about decisions that we make in regards to money. You can take the advice or leave it, but it helps to hear someone else’s perspective (they may have had to make the same decision in the past). This is why I also suggest that you consult a financial planner to work with you before any decision is made. In this way, not only is the initial adrenaline rush discussed, but also the implications for the future that might result due to money decisions that are made today.