Home Equity Loans – second mortgage

Bruce Owens asked:


Home equity loans can allow Canadian homeowners to leverage the gains they made in what was until recently a red-hot housing market into investments in other sectors. Home ownership, which was once the key fundamental to Canadians’ wealth accumulation strategies, while still important, will likely take a back seat as a strategy in the near term as investment savvy home owners shift their accumulated wealth into other markets. Leveraging built up home equity is a highly advantageous method of making this switch in investment tactics.

The most recent economic forecasts indicate that Canada’s overall housing market has settled into what will be a period of slow growth. Home owners who saw the equity in their homes grow by leaps and bounds as Canada enjoyed its longest sustained housing boom since the Second World War are now sitting on substantial capital that is locked up in their home. But the return on this capital will only grow moderately over the next several years and it is not clear that gains in housing prices will necessarily outstrip inflation.

The latest view from economists at the TD Bank Financial Group is that sales of new and existing homes are likely to continue to decline in the near term and housing prices will only increase modestly. TD’s forecast is that “sales are likely to continue to decline in the coming quarters and price growth will slip to 2% on a national average basis in 2008 and rise only to 3.5% in 2009.” They note that this national average will vary by regional markets, with some local markets that saw the biggest run ups in housing prices – such as those in Alberta and British Columbia – experiencing a drop in housing prices as regional markets adjust. But, they predict, “Most markets will see low to mid single-digit growth.”

The Financial Post reports that most leading economist are expecting the Bank of Canada “to keep interest rates at 3% in 2008 before hiking them in 2009 as inflation becomes more of a concern and the U.S. economy picks up.” Of course, as Canada’s central banker hikes its lending rate, banks, trust companies and other financial institutions will raise their prime rates in due course.

With current low interest rates, homeowners looking for more continued and substantial growth in their existing assets can take out a home equity loan for investment purposes and purchase a risk balanced investment portfolio that is highly likely to carry a much better return than the moderate housing price increases that are forecast for the rest of 2008 and into 2009. The bonus is that the interest paid out on a home equity loan taken out for investment purposes is tax deductible. Effectively, the tax savings a typical homeowner/investor is likely to get will in most instances offset a large portion of the borrowing costs. If gains on the investment outstrip, as they should, the moderate gains forecast for housing purposes, homeowners who leverages their home equity in this manner will see real growth in their overall assets.

An abundance of caution should of course be used when leveraging your home equity in this manner. Ensuring that the investment portfolio you choose is well balanced is a key. Working with an experienced and knowledgeable financial planner is highly recommended, as is working with a mortgage broker to access the best available rates and terms for a home equity loan while interest rates remain at their current low level.



TRACEY

Bruce Owens asked:


Second mortgages are allowing Canadians to realize their home renovation aspirations. Canadian homeowners have accumulated significant equity in their homes as housing prices have increased year after year in what has been, until recently, the hottest housing market this country has witnessed since the end of the Second World War. Now that the housing market has cooled, however, Canadians are using some of the equity they have built up to finance significant upgrades to their homes through renovations.

The Canadian Mortgage and Housing Corporation tracks home renovation trends across Canada. Recently released statistics from the CMHC show that Canadians spent close to $19.7 billion last year in the 10 major urban centers that were surveyed. Overall, 37% of the households surveyed reported that they had completed some form of home renovation in 2007. Canadians reported that the main reasons they undertook renovations were “to update, add value, or to prepare to sell their home.”

Most Canadians- about three quarters – paid for home renovations from their savings; however, 20 per cent of home renovators paid for their renovation project with a credit card or line of credit. Not surprisingly, the average amount spent on renovations paid for with credit was higher than the amount spent from savings – $13,500 versus $11,200.

Indications are that these trends will continue in 2008, as two out of five respondents in Canada’s five largest regional centers – Vancouver, Calgary, Toronto, Montreal and Halifax – indicated that they were planning on undertaking home renovations in 2008. With a cooling housing market, and house prices forecast to grow only marginally in 2008 and 2009, home renovations represent one way in which homeowners can act to build in value to their homes.

Home renovations make sense either to enhance the enjoyment of one’s home or to increase its curb appeal in an emerging buyers’ market, but homeowners using savings or, worse yet, credit cards to finance major home renovations risk depleting their assets. Far better, to arrange a second mortgage or line of credit secured against your home’s existing equity when undertaking a major home renovation project.

While savings or credit card debt can readily finance a minor renovation project such as remodeling a bathroom or painting and wall papering – two of the most popular projects according to the CMHC -when undertaking a major renovation, like building an addition or finishing a basement, it makes sense to use a second mortgage secured against existing home equity as second mortgages carry a much lower interest rate than most credit cards. Moreover, second mortgages can be structured as construction loans, where money is borrowed in “draws”or stages as each phase of a major renovation is completed, cutting down the interest you pay during the renovation process.

Second mortgages are available from commercial banks and trust companies, as well as from a wide pool of other financial institutions and private lenders. Generally, they will carry a marginally higher interest rate than a first mortgage, but their carrying costs need not be prohibitive. If you are contemplating major home renovations and plan to finance renovations through a second mortgage, working with an experienced and well-resourced Canadian mortgage broker can help you access favourable terms and interest rates that may not be commercially available from your bank, credit union or trust company.



ELMER

The House Team Of Mortgage Intellingence asked:


Your best-performing asset probably isn’t that star mutual fund in your portfolio. Most likely, it’s the roof over your head.

Residential real estate has been on a prolonged and spectacular rise in almost every part of the country. Odds are that – wherever you are in your mortgage – you’ve seen a great increase in your home equity.

Rising home values have made real estate a great investment for Canadians. So good, in fact, that a record number of average Canadian homeowners have a plan to multiply that advantage: by purchasing investment property.

In most cases, these people don’t have wads of cash on hand to plunk down for a second property. What they have is equity in their principal residence. That translates to assets that they can leverage to maximize their real estate investment potential.

Leveraging is a powerful financial strategy. The idea is this: you can access funds for a downpayment on an investment property by tapping into the home equity that’s building in your principal residence. The investment property is managed to provide income to cover the mortgage payments and property expenses. Remember, too, that the interest on the mortgage is tax-deductible for an investment property: another important advantage in building your investment. Many investors keep the leverage strategy going: as one investment property begins to build equity in a rising real estate market, it can be leveraged to purchase another property.

There are many motivations for this kind of investing. In some cases, the investments provide some available income almost immediately. Others see the investment property as a kind of retirement plan: the rent will provide important income at a later date, or the property can be sold to provide a retirement nest egg without the burden of landlord responsibilities.

In university towns, you will often find investment properties that have been purchased by parents. At a time of rising housing costs for students, this has become a sensible strategy: the child has accommodation during their school years, and takes on the responsibility of landlord to other students who rent the extra space to cover the ontairo mortgage.

Investors who are skilled at home improvement will sometimes leverage their equity to purchase an investment property, improve it, and then sell for a profit – progressively building their net worth by capitalizing on both their skills and rising home values.

But the most common reason for purchasing an investment property is simply to capitalize on the wealth-building power of residential real estate. Rising home values continue to give you a steady increase in net worth – whether or not you are pocketing profitable rents. You’ll only want to ensure that the property will cash-flow to cover the mortgage and maintenance costs.

Independent mortgage brokers now have access to a range of mortgage options for investment properties, and can help you assess your situation. One of the most innovative lenders, GMAC, has a mortgage called iinvest, which makes it easier than ever for average Canadian homeowners to purchase investment properties. In most cases, you should anticipate tapping into your home equity for a 25% downpayment on an investment property. (GMAC’s iInvest actually offers approvals up to 85% on mortgages up to $500,000 or $700,000).

How much of your home equity can you access? Let’s say you have $80,000 remaining on your mortgage and your home is valued at $280,000. If a bank will loan 90% of the value, then you have access to $252,000. You still need the $80,000 for your existing mortgage, but that leaves you with a potential $172,000 in available funds. You will, of course, want to make only a minimum downpayment, as it makes good tax sense to hold your larger mortgage on your investment property.

Many wealthy Canadians have achieved their financial success by leveraging small assets to create progressively larger ones. It’s a great way to fatten an investment portfolio, build net worth, or save for an earlier retirement. Best of all, it’s a strategy that’s within the grasp of most Canadian homeowners.



MATTHEW