So you think it’s a good idea to not have a mortgage? – Mortgage

My Mortgage Blog

So you think it’s a good idea to not have a mortgage?

There are many reasons to have a mortgage, even if you have the financial resources to pay off your home completely –

  1. Emergencies – Everyone would benefit by having access to the equity in their home for emergency purposes. It is better to have access to the equity in your home and not need it than to need it and not be able to get it.

Every month I get calls from people who have lost their job, recently retired, or encountered a family emergency and they are looking to access home equity to cover unexpected expenses.

The biggest secret in Canadian real estate is that a mortgage is a loan against your income, not against the value of your home.  Being house rich and cash poor is a dangerous financial position.

  1. Diversification – Canadians believe that home equity is a very safe investments and keep a large portion of their net worth in real estate. Having a mortgage doesn’t affect your homes value and doesn’t stop you from building equity in your house.

In finance, the only free lunch is diversification, and accessing home equity to diversify into other assets can reduce your overall financial risk.

  1. Return – many people create wealth more quickly by borrowing against the value of their home. In Canada money borrowed to invest creates a tax deduction for interest expense.

For example, consider an investor with a 2.69% 5 year fixed interest rate in a 50% marginal tax bracket would by paying 1.345% after tax interest – any return above 1.35% will create wealth for that investor.

Since the house will grow (or fall) in value with or without a mortgage, any equity you currently have in the house is, essentially, earning no interest. You wouldn’t stuff $10,000 under your mattress, so why stash $400,000 equity in the walls of your house?

In Canada, home equity is your cheapest financing available and can provide tax fee capital in retirement – as opposed to taxable income from corporation, investments, and RRSP’s/RRIF’s.

In addition, accessing home equity when you don’t need it will have you prepared for the unexpected.

Kevin Bell, CFA