Canadians naive about how long they’ll be in debt

[Knalus]

Originally Posted by Flames in 07

Most millionaires are made by borrowing money and earning a return in excess of the cost of debt.

Millionaires and bankruptcies both.

[Flames in 07]

Originally Posted by Knalus

Millionaires and bankruptcies both.

Yep, people on both sides of the financial acumen spectrum borrow money. Some do it for awful reasons, some do it for great reasons. Many people over these pages can't tell the difference and assume all debt is bad.

[blankall]

Originally Posted by Flames in 07

Your are flat out wrong. Asset backed debt is different than just owing money. It's really quite shocking how little most people comprehend financial concepts. The vast majority of the people who have posted here have no clue.

Agreed.

A good example. If I own a house worth $5,000,000 and I have a $10,000 mortgage on it, am I $10,000 in debt or do I really just have a lot of assets?

Equity in your home counts as an asset, and unless you are underwater, your mortgaged home counts as a positive asset.

[Bill Bumface]

Originally Posted by blankall

Agreed.

A good example. If I own a house worth $5,000,000 and I have a $10,000 mortgage on it, am I $10,000 in debt or do I really just have a lot of assets?

Equity in your home counts as an asset, and unless you are underwater, your mortgaged home counts as a positive asset.

But what are you going to do with equity in your house?

You have to live somewhere, so unless you are playing on moving to a condo in Nunavut when you retire, it's useless to you.

House prices doubled. Yay. I have a bunch of fake equity I can't do anything with.

The only good part of having a paid off house is not paying interest anymore and having greatly decreased living expenses.

[blankall]

Originally Posted by hulkrogan

But what are you going to do with equity in your house?

You have to live somewhere, so unless you are playing on moving to a condo in Nunavut when you retire, it's useless to you.

House prices doubled. Yay. I have a bunch of fake equity I can't do anything with.

The only good part of having a paid off house is not paying interest anymore and having greatly decreased living expenses.

You can do lots with equity in a home. By your reasoning, any non-liquid asset is worthless since you can't "do anything with" it. Some assets you have are going to be liquid and some aren't. And it's not "fake equity". It's actual equity.

Everyone needs a place to live and that's going to be an expense. So having to not pay a mortgage or rent is a pretty big savings. Not to mention most people have a substantial amount of their retirement savings in their home. They liquidate this when they retire and downgrade.

[Flames in 07]

Originally Posted by hulkrogan

But what are you going to do with equity in your house?

You have to live somewhere, so unless you are playing on moving to a condo in Nunavut when you retire, it's useless to you.

House prices doubled. Yay. I have a bunch of fake equity I can't do anything with.

The only good part of having a paid off house is not paying interest anymore and having greatly decreased living expenses.

you can do many things with it, if you are old enough you can retire off it, with a reverse mortgage, you can live in a smaller house in the same city and cash in, or you can move to a cheaper town. Pretty much like the majority of people who plan their retirement right. The fact that you have a house outright and think you can't do anything with it means you (I'm not making fun, I'm serious) ought to take a course or two on how to handle finances as you retire.

[Bill Bumface]

Originally Posted by Flames in 07

you can do many things with it, if you are old enough you can retire off it, with a reverse mortgage, you can live in a smaller house in the same city and cash in, or you can move to a cheaper town. Pretty much like the majority of people who plan their retirement right. The fact that you have a house outright and think you can't do anything with it means you (I'm not making fun, I'm serious) ought to take a course or two on how to handle finances as you retire.

1. I covered downsizing/moving out of the city

2. Reverse mortgages seem like the final act of over-leveraging yourself, but that's my own opinion, so I'll give you that.

I'm mostly talking about all these people that bought a house, had the price shoot way up, and now feel like they have more money because their house is worth a higher imaginary number.

Yup, some people pull equity out of their houses and do some crazy stuff with it, but that is the same as just taking out a loan from the bank, its just a question of if its in the form of a mortgage, LOC or HELOC, its still just a bank loan you are playing with, one is backed by your house so I guess you can borrow more.

You still need somewhere to live.

Even though I bought my first place before the huge upswing I'd still be much happier if Calgary was still at 1999 house prices.

[flamesfever]

Originally Posted by hulkrogan

1. I covered downsizing/moving out of the city

2. Reverse mortgages seem like the final act of over-leveraging yourself, but that's my own opinion, so I'll give you that.

I'm mostly talking about all these people that bought a house, had the price shoot way up, and now feel like they have more money because their house is worth a higher imaginary number.

Yup, some people pull equity out of their houses and do some crazy stuff with it, but that is the same as just taking out a loan from the bank, its just a question of if its in the form of a mortgage, LOC or HELOC, its still just a bank loan you are playing with, one is backed by your house so I guess you can borrow more.

You still need somewhere to live.

Even though I bought my first place before the huge upswing I'd still be much happier if Calgary was still at 1999 house prices.

It's true that our housing bubble, and the vulnerable equity that comes with it, can make people feel richer than they really are, and end up borrowing more against the equity in their home. That's obviously what's causing the accelerating household debt, along with the unusually low interest rates.

There's many warnings about this these days, and I hope people start listening.

[Bill Bumface]

Originally Posted by flamesfever

It's true that our housing bubble, and the vulnerable equity that comes with it, can make people feel richer than they really are, and end up borrowing more against the equity in their home.

The thought of "*poof* equity is gone!" is probably pretty scary for some people. When I moved into my place I had to take a LOC for a new roof as every penny I had went down so I didn't have to pay CMHC. I didn't sleep right until it was paid off. I hate owing people money. I could never be one of those guys who borrows a ton of cash to invest, or to start a business.... which is why I'll never be rich.

[flamesfever]

I think it takes all kinds, and timing is everything.

[shermanator]

I'm hoping to pick a few brains on this. I'm in my late 20's, and trying to pay off the mortgage on my condo while interest is low, but I also put 10% away into a savings plan through work.

When I run into extra money, is it better to toss it into savings or throw it at the mortgage? Or do a little of both?

[Fire]

Originally Posted by shermanator

When I run into extra money, is it better to toss it into savings or throw it at the mortgage? Or do a little of both?

I would throw it at the mortgage assuming you don't have to pay a penalty. You would most likely save more money long term doing it that way. I am guessing that the money you are saving is just sitting in a saving account making you very little.

[Flames in 07]

Originally Posted by shermanator

I'm hoping to pick a few brains on this. I'm in my late 20's, and trying to pay off the mortgage on my condo while interest is low, but I also put 10% away into a savings plan through work.

When I run into extra money, is it better to toss it into savings or throw it at the mortgage? Or do a little of both?

You are better off investing if your return is better than your mortgage after tax.

[AMG_G]

Originally Posted by Flames in 07

You are better off investing if your return is better than your mortgage after tax.

There's no gaurantee that your investment will make money but paying down your mortgage and saving that amount in interest is. It's easy to say you can make more in investments to offset the interest but how many can do it consistently?

[1stLand]

Well prices of homes have gone up 5% this year. Take that money out of your home through a HELOC and invest that money in an investment company that does alot of advertising on Talk Radio.

The bigger returns promised the better.

[Slava]

Originally Posted by AMG_G

There's no gaurantee that your investment will make money but paying down your mortgage and saving that amount in interest is. It's easy to say you can make more in investments to offset the interest but how many can do it consistently?

Well it feels more secure to pay the mortgage, but there are a couple of factors. First the interest you're saving today is say 3.5%? Its not a huge number. Depending on how this is structured and a few other factors the after tax return on the investment you need is say 2.135% per year at this point. You can buy a five year GIC and earn more than that.

Let's keep things simple though and just say the choice is pay 3.5% in interest. (not pay down the mortgage) or invest and earn more than that. If you look at almost any medium risk investment over the last decade you will see returns above that. You could also look at a lot of lower risk investments (various bond mandates) and see returns north of 4% to pass that rate. This includes the financial crisis, but assumes that you stuck with that same mandate. I am not basing this on anything in particular (mutual funds, ETFs, stocks,etc). It wouldn't have worked with a bank account, but it can be done.

A couple of caveats though. First this is based on what has taken place and of course no one knows what tomorrow holds. The other is that these types of things aren't for everyone. Some people just plainly can't sleep at night owing people money! Obviously this kind of thing would be torture for them.

[Red]

Originally Posted by Slava

Well it feels more secure to pay the mortgage, but there are a couple of factors. First the interest you're saving today is say 3.5%? Its not a huge number. Depending on how this is structured and a few other factors the after tax return on the investment you need is say 2.135% per year at this point. You can buy a five year GIC and earn more than that.

Let's keep things simple though and just say the choice is pay 3.5% in interest. (not pay down the mortgage) or invest and earn more than that. If you look at almost any medium risk investment over the last decade you will see returns above that. You could also look at a lot of lower risk investments (various bond mandates) and see returns north of 4% to pass that rate. This includes the financial crisis, but assumes that you stuck with that same mandate. I am not basing this on anything in particular (mutual funds, ETFs, stocks,etc). It wouldn't have worked with a bank account, but it can be done.

A couple of caveats though. First this is based on what has taken place and of course no one knows what tomorrow holds. The other is that these types of things aren't for everyone. Some people just plainly can't sleep at night owing people money! Obviously this kind of thing would be torture for them.

Maybe it's too early in the morning for me, but if you have a guaranteed, non taxable benefit of 3.5% (mortgage) how can 2.135% in taxable gains equal that? Add management fees and wouldn't you need about 5% returns just to break even?

[Slava]

Originally Posted by Red

Maybe it's too early in the morning for me, but if you have a guaranteed, non taxable benefit of 3.5% (mortgage) how can 2.135% in taxable gains equal that? Add management fees and wouldn't you need about 5% returns just to break even?

Because if you're going to do this you would likely borrow to invest and write off the interest. Its the same net risk to the investor, and just lowers the after tax return.

The management fees are out of the equation. I used a GIC, where as long as you don't cash it early, there are no fees. Obviously its rudimentary, but you have to look at after fee, after tax returns for anything here...otherwise you're not doing proper due diligence IMO.

[Slava]

I should note as well that there are all kinds of risks associated with this type of strategy, but the question was asked about how many people can earn enough investing as opposed to paying down the mortgage. At this point I would say its a pretty low bar, all other things being equal.

[Red]

Originally Posted by Slava

Because if you're going to do this you would likely borrow to invest and write off the interest. Its the same net risk to the investor, and just lowers the after tax return.

The management fees are out of the equation. I used a GIC, where as long as you don't cash it early, there are no fees. Obviously its rudimentary, but you have to look at after fee, after tax returns for anything here...otherwise you're not doing proper due diligence IMO.

I assumed that you had cash and a choice to pay down your mortgage or invest it.

Still not seeing the numbers adding up. I must be missing something.

You borrow 100k at some rate, then you invest it, then you deduct interest costs and pay tax on the gains. And you come out better off than 3.5%.
What rate of return would you need to accomplish that? And what risk to get that return?

And where did the 2.135% return number come from? A GIC doesn't even come close to getting a 3.5% return you are guaranteed by paying down the mortgage.

Am I way off? I think you need a 5% or better to equal the mortgage interest savings.