Tapping equity brings pitfalls

[Dion]

http://www.canada.com/calgaryherald/...7bacc9&k=98775

But others warn that by using money from the equity in their homes to pay off debt, more spending is encouraged and more of people's financial health is tied up in their homes. All say there will be trouble in the months or years ahead if the economy takes a downturn or interest rates increase.

"Calgary is an expensive place to live and (people) are spending more than they make every month to try to keep their house going, and car payments and kids going," said David Smith, a trustee in bankruptcy at Bromwich & Smith Inc. "There's an uneasy sense of what is going to happen in the next few months to a year."


"People are on a financial treadmill. They're keeping their payments up-to-date but they're not paying the debt down," said Alberto Rosati, manager of the personal restructuring services group at Deloitte & Touche.

The Office of the Superintendent of Bankruptcy reports that Canadian consumers are continuing to incur debt at a faster rate than their incomes are increasing.

[Cowboy89]

This is what happens when people view what they can afford based on what some institution is willing to lend them. There are only two things in which it is reasonable to make payments on: 1. House and 2. Car, and even then going too far on either of which can bankrupt you.

[Hemi-Cuda]

Originally Posted by Cowboy89

This is what happens when people view what they can afford based on what some institution is willing to lend them. There are only two things in which it is reasonable to make payments on: 1. House and 2. Car, and even then going too far on either of which can bankrupt you.

yep, those are the only two things i've ever had a debt towards (and even my car was paid off within a few months). for everything else, if i don't have the cash in my bank account, i don't buy it, simple. i don't understand what's so hard for some people about not buying stuff you can't afford

[Slava]

People should be advised of this when they undertake these strategies though...it should be made known why it may/may not be in their best interest.

[GoinAllTheWay]

Every day in my office I have people phoning in to add interested parties to their home policies. 9/10 are adding a massive LOC for no other reason then their bank has offered it to them. No plans for it just taking it out and I don't get it. The temptation to spend that kind of cash would be to much for most and that is exactly what the bank is hoping they do I'm sure. I made a lot of financial mistakes in the past and am only now paying them off and I will do everything in my power to make sure that does not happen again. I have TONS of equity in my place that is still their thank God, and no ones grubby hands are in it other than mine.

[Red]

Not surprised to hear that. People treat their new found wealth which they didn't have to lift a finger to earn as a savings account. Sadly some are using that money for risky investments like the stock market

[Hemi-Cuda]

Originally Posted by Red

Not surprised to hear that. People treat their new found wealth which they didn't have to lift a finger to earn as a savings account. Sadly some are using that money for risky investments like the stock market

i always found it funny how it's illegal for minors to gamble, yet any 16 year old with a computer can trade away to his heart's content on the stock market. it's virtually the same thing

[Torture]

Originally Posted by Cowboy89

This is what happens when people view what they can afford based on what some institution is willing to lend them. There are only two things in which it is reasonable to make payments on: 1. House and 2. Car, and even then going too far on either of which can bankrupt you.

What do you think about loans to pay for University?

[Flame On]

In the months ahead? Is it believed there will be a massive downturn in that period of time? I thought even with a slight dip it will be more like a plateau than a dive.

[Winsor_Pilates]

Originally Posted by Flame On

In the months ahead? Is it believed there will be a massive downturn in that period of time? I thought even with a slight dip it will be more like a plateau than a dive.

All depends who you ask. Personally, I think the plateau is the better guess.

[BlackArcher101]

Originally Posted by Winsor_Pilates

All depends who you ask. Personally, I think the plateau is the better guess.

I'm going to go out on a limb here and give my prediction (results exaggerated). Fluctuations of housing prices or economy strength increasing and decreasing in a decaying oscillating pattern. (Note: I'm not an expert, but I did stay in a Holiday Inn last night). Let the madness begin!

[HOOT]

Originally Posted by Torture

What do you think about loans to pay for University?

Only if you spend it on booze and condoms...other than that its a waste

I have heard bad things about student loans however you gotta to do what you gotta do. Have a plan to pay them back on time or else you will pay big time for it from what I have heard.

My favroite is watching american channels and they tell you call this number for a loan but you read the small print and a $2500 loan over so many months and interest rate it equals to like $9,700 by the time you are done paying it. No wonder why people get into money troubles.

I cant stand those Payday loans, they should be outlawed people will NEVER get ahead with those things, the interest/fees are ridiculous most likely if you are borrowing $500 this paycheck you will be paying it back with your next one and then be short again and go through the same hoops.

Peronsally I have a LOC I try not to use unless I need to which I, for the most part, have paid off every month. Other than that maybe a few hundred bucks on a credit card from random stuff.

[ken0042]

Originally Posted by GoinAllTheWay

9/10 are adding a massive LOC for no other reason then their bank has offered it to them. No plans for it just taking it out and I don't get it. The temptation to spend that kind of cash would be to much for most and that is exactly what the bank is hoping they do I'm sure.

Yep, which is why when I borrowed money to pay for building the garage, I got a 2nd mortgage, and then when the main mortgage comes up I can roll the two together. That way I borrowed exactly what I needed; so that I couldn't be tempted to keep dipping into it.

[ericschand]

Originally Posted by HOOT

My favroite is watching american channels and they tell you call this number for a loan but you read the small print and a $2500 loan over so many months and interest rate it equals to like $9,700 by the time you are done paying it. No wonder why people get into money troubles.

I cant stand those Payday loans, they should be outlawed people will NEVER get ahead with those things, the interest/fees are ridiculous most likely if you are borrowing $500 this paycheck you will be paying it back with your next one and then be short again and go through the same hoops.

All of the ads are structured to appeal to your ego.

There's even ads out there for the elderly to take their current paid
off home, and get a LOC attached to it. In it the elderly couple takes
trips, has a nice car, and gifts for the grandchildren. Why? Ego.

Who wants the 5 year old Taurus you can afford, vs the latest top
end Honda Accord, or the Volkswagen Eos? ooooh...ahhhhh...what
a beautiful car....crap, why are my bills out of hand? That last part
they don't show you.

Would you rather drive a 5 year old car you can afford, or a brand new
one off the lot that you can get by getting a car loan, LOC/2nd-mortgage?
It's easy, just go in and fill out the paperwork.

They even use terms like "equity". Use the equity in your home!
What they really mean is, give us the equity so you have nothing to
pass onto your estate.

I've even heard of people putting $5,000 to $6,000 on a credit car
in order to get the car! At 19+% interest? For a car which will
depreciate faster than that payment?

The banks (or other lenders) are trying to set it up so you are
indebted to them financially for the rest of your life. Many people
are headed that way.

Your house and your education. Maybe your car, but keep it very
affordable, and possibly buy used.

ers

[ericschand]

Originally Posted by ken0042

Yep, which is why when I borrowed money to pay for building the garage, I got a 2nd mortgage, and then when the main mortgage comes up I can roll the two together. That way I borrowed exactly what I needed; so that I couldn't be tempted to keep dipping into it.

ken, you didn't ask, however, if you aren't careful, the cost of the garage
will end up being more this way, compare to a secured loan against your
house, due to the length of the mortgage. If you can, increase your
mortgage payment(s) to offset the cost such that it lasts 5 to 7 years,
and then you are back to your original mortgage only. (assuming 5 to 7
years is how long you intended to keep the loan, and you can afford
that payment)

ers

[Cowboy89]

Originally Posted by Torture

What do you think about loans to pay for University?

I would recommend working while in school to avoid any crippling debt afterwards, however I do understand that some people's circumstances don't allow to get through school without borrowing (Especially for law and medical school). If it must happen then so be it. However in my day I've seen plenty of students borrow money and it all goes to Molson and Du Maurier while they don't pay much attention on their schooling. As long as you know what you're getting into and while your in debt every spare cent you have gets ploughed back into servicing and paying it off. It's a monkey you don't want on your back very long.

[Sylvanfan]

The problem is that they keep selling it as if this is the USA and that the loan against your house is something you want. The huge difference is that in the USA the interest on your mortgage is tax deductable, so if you're going to have debt make it tax deductable. In Canada we don't really have that option. There are methods you can use, but none of them are as simple as just writing off the interest on your mortgage, especially for people who don't have a multi million dollar net worth and only one property to their name.

I don't mind the idea that eventually my mortgage will be converted into an investing line of credit so that 15 years down the road technically my house is paid off, but I'll still have the value of the house in debt but invested in something else that is tax deductable and strategically placed in an investment where I should see some growth. I think that will position me to come further ahead.

But the worst thing you can do in Canada is to continually add to your mortgage or take out HELOC's and than keep spending it on consumer goods and other stuff where the loans are not tax deductable. We pay far too much tax in this country to get away with strategies like that.

[ken0042]

Originally Posted by ericschand

ken, you didn't ask, however, if you aren't careful, the cost of the garage
will end up being more this way, compare to a secured loan against your
house, due to the length of the mortgage.

Yeah, I looked at that when exploring my options. I know it isn't the best option for everybody, but it was the best option for me. One thing this has done is allowed me to have the exact house I want; without having to move. It also allows me to keep the lifestyle I'm used to.

The one way of looking at it; from a financial perspective is that on the 21 years left on my mortgage, I will pay twice as much for the additions as opposed to paying for them up front. But had I tried to save up the cash; it would have taken me 10 years, and assuming I live in this house for 20 years; I would have only gotten the use out of it for half the time.

I know you were suggesting somewhere in the middle; but that would have also made it impossible for me to do what I'm doing with the rest of the 2nd mortgage; and that is buying cottage property in Manitoba.

[Muta]

Yup, there's usually two things that people should be consistently paying off until their done... 1) a house, and 2) a car. Everything else is just sugar.

For me, #2 is paying off my travels, not paying for a car, so those two negate each other. I make it a priority tho, that each month a certain amount is dedicated to making the payments first and foremost, and any additional at the end of the month is then tacked on to the next payment. Once that's paid off early next year, I do the same thing for saving for the next trip until I have enough.

Money management isn't hard; the only thing it requires is commitment and tolerance. I really have a hard tim understanding why most people are so bad with money.

[Tron_fdc]

Originally Posted by Muta

Money management isn't hard; the only thing it requires is commitment and tolerance. I really have a hard tim understanding why most people are so bad with money.

A lot of it has to do with impulse spending IMO. I know I've been guilty of it (on more than one occasion)...I see something that I don't really need (but I really want) and if there's enough money in my account I go out and buy it.

I would say for the most part that's not a problem; as long as your impulses don't fall into the "major purchase" categories. Taking out a HELOC to buy a shiny BMW might not be the smartest thing you can do.