Is It Wise to Draw Equity from Your Property?

Is it wise to draw equity from your property to:

Buy real estate?
Go on vacation?
Invest in RSP’s?
Invest in non-RSP’s?
Spend on education?
Consolidate debt?

These are a sample of the most popular questions that are asked us as financial planning experts from the debt side of the ledger.  With many years of service as a financial executive in the corporate world and now a dedicated commercial and residential lending professional I have general advice on this list of questions that may go against what many financial institutions will advise.

Is it wise to draw equity from your property to buy real estate?

Yes it can be – with caution, sometimes.  Caution is on the side of: what property will you be investing in?  And, how much will you borrow?  If it is a revenue property that cash flows well, then great.  If set up right, you can deduct all interest expense of borrowing.  If it is a property in Arizona, then you best beware of all of the implications, never mind the fact that you will be owning a property remotely in another country.  Becoming a U.S. property owner; you open yourself up to U.S. tax laws which could put you and your long term estate plans at risk.  There is a recommended method of holding the title of a U.S. property, depending upon your personal financial and estate details.  Often what is used is a Cross Border Irrevocable Trust, although this may not be beneficial for everyone.  Make an appointment with us to more thoroughly explore this potential opportunity.

Is it wise to draw equity from your property to go on vacation?

This question has the most direct unequivocal answer - Absolutely positively no!  To do this would be part of a bad financial plan at best.   Contrary to often placed ads by various financial institutions, that will at least elude to doing this - vacations are a luxury that should only come from savings put away for such purpose.  Using a credit card for payment of vacations should only be for convenience of transaction, paid entirely in full after your statement arrives.  Never use equity from your real estate via mortgaging for vacationing!

Is it wise to draw equity from your property to Invest in RSP's?

Sometimes yes.  If your mortgage is coming due or there are not large costs to disrupt your exsisting mortgage, in moderation this can be part of a good financial plan.  Before RSP's are contributed to though, you should have enough TFSA's set up as a "rainy day" or emergency fund.  Over the years I have dealt with clients that were RSP poor.  They had absolutely no non-registered funds available for unforeseen expenditures, therefore resorted to consumer debt, or worse, liquidating RSP’s to pay for unexpected cash needs that arose.  Liquidating RSP's is a double whammy because it will trigger taxes that you otherwise would not have to pay.  An overall financial plan is required to make sense of this potential option.  Part of the plan would be to pay down on your mortgage with tax refunds received after filing your taxes.

Is it wise to draw equity from your property to Invest in non-RSP's?

Sometimes yes.  Only in concert with a well thought out financial plan, in moderation, with much caution towards the investments you use your mortgaged equity for.  If done correctly with the proper mortgage product, interest from mortgaging for this can be deducted for tax purposes, whether your property is fully paid off or not.  This should only be done by those that fully understand the risks and have the financial wherewithal to withstand potential losses or bear markets.  A better investment use of equity may be to invest in your own business which you will have a more in depth understanding of and control.

Is it wise to draw equity from your property to spend on education?

Generally no, only yes if for a one time draw on equity through mortgaging after a well thought out financial plan is established.  The costs of re-mortgaging would need to be reviewed to ensure they are not excessive if penalties are involved, which could make drawing equity for this purpose unadvisable. Analysis would need to be done on any existing mortgage to determine if this would be advisable.  Smart planning calls for setting up and saving for RESP's (in the case of children) well ahead of time.  RESP's are one of the best gifts from our government because they will match up to 20% of your contributions!  Free money - which is not too aften available!  Call us to refer you a smart reliable investment planner to work with you for planning, saving and investing.

Is it wise to draw equity from your property to consolidate debt?

Generally yes, but only after the reason for the accumulation of (non-mortgage) consumer debt is understood and can be avoided in future.  Again, a good financial plan is essential to ensure that you do not go back into debt in future.  Coming to terms with changing to have a disciplined approach to spending can be difficult but is an extremely important thing to do.  A good consolidation will leave you with the ability to start accumulating cash to establish an emergency fund to use when unforeseen expenses arise.  Being able to avoid consumer debt for cash needs is key to staying in good financial shape.  When debt consolidation is done we will always assist you in putting a plan together going forward and refer you to an excellent investment planner to keep you on track.

Mortgage Logic is available for assistance in planning for your future and properly structuring the use of debt.