Mortgage renewal/investing question....

[Tik-Tok]

Please bare with me, I'm not into the investment world AT ALL (asides from regular contributions to RRSP's)

Question A) Does the following scenario make sense

Lets say my mortgage is up for renewal, and instead of continuing the "regular" mortgage, I'm 10 years into 25 year amortization, Lets say my mortgage left is $200,000. My home is worth $420,000.

I can remortgage up to 80% of my homes value, so I remortgage as much as possible, so $336,000, at current rates, I renew for 5 years fixed at 2.9%, for a 25 year amortization (to keep payments close to what I have now)

I take the extra cash from my homes equity, $136,000, and invest it.

Question B) Would 10% return be reasonable?

If so, I'm earning (after taxes), another $11g a year, that I keep investing. So after 5 years, I should have $295g, that would more than pay off the mortgage come renewal time.

Question C) Is this normal to do something like this? Would you? Am I missing something?

edit: my marth might be way off here... I'm working on my 3rd glass of scotch.

[ercchry]

10% return is a pipe dream for passive investing... so... yeah. rule of thumb is to pay off your primary and maximize the leverage on income properties... is this was a rental and you are still cash flowing i'd say give'r

also banks are being super conservative now-a-days with refinancing, so you might not get what you want in cash.

i dunno... if it was me i would use that cash to purchase a few rental properties... ones that would cash flow enough to cover your new mortgage... 3 free homes in 25 years!

[ExtraSlow]

this is pretty common. Talk to either of the mortgage guys on here (Todd or Frank) and they can work you through the details.

I also think 10% is a pipe dream. 5 or 6% may be more reaslitic.
Keep in mind that'll increase both the monthly payment AND then length of time it'll take you to pay off your rmortgage.

Good luck.

[blitz]

Also keep in mind that your investment could go down instead of up.

[cmodem]

Originally posted by blitz
Also keep in mind that your investment could go down instead of up.

Exactly what blitz said. Are you willing to lose your money? nothing is ever a given in the stock market. Right now the markets are at 5-7 year highs, and alot of stocks are at high multiples of earnings and book values (well based on value investing principles). I'd take that into consideration and trek carefully with your plan.

[JLau]

If you can get guaranteed 10% return, i would max out everything and invest into it, but no such thing as guaranteed especially at 10% return

Also, thats net return or are there management fees and performance bonuses you have to pay

[Frankie88]

10% return seems pretty high to me. There are funds/stocks you can certainly achieve 10% a year in the past, especailly if you bought at the low, but that's totally not guaranteed. However, I have seen refinancing eg. @ 3% and invest the proceed to achieve better return, as in that case, the interest on the equity taken out to invest is tax deductible as investment cost. Also, if you buy RRSP, you can also take advantage of the tax refund under your tax bracket, but fund is locked in the RRSP unless you use it on HBP(apparently you have a house so not eligible) or LLP.

[skandalouz_08]

In a passive investment such as a GIC right now you'd get 2.5% on a 5 year term which means on your 2.95% mortgage rate you'd be losing money.

There are no mutual funds out there that have guaranteed returns. There are ones that have guarantees that you can't lose any of your principal (if held to maturity) but if after 5 years you come out of it with only your principal you're just hurting yourself.

What you're talking about is possible (not at 10%) but getting a return higher than 3%, but you have to be willing to take some risk and the chance that you could lose some or all of the money you invest. If everything went south in your life are you willing to lose your home?

[Tik-Tok]

Originally posted by skandalouz_08
If everything went south in your life are you willing to lose your home?

Well, I wouldn't lose my home, because I would just be back to a 25 year amortization, instead of 15. The monthly payments would be pretty close ($200g @15 years, vs $360g @25 years).

No risk, no profit right, but I think I'll hold off on this idea for now.

[tpurcell4]

Originally posted by Tik-Tok


Well, I wouldn't lose my home, because I would just be back to a 25 year amortization, instead of 15. The monthly payments would be pretty close ($200g @15 years, vs $360g @25 years).

No risk, no profit right, but I think I'll hold off on this idea for now.

I recommend talking to both an accountant and a CFP for a program like this. Like you say no risk, no reward, but do not take unreasonable risks. If you take basic accounting and financial planning courses you will learn that if you borrow money at 3% you will break even at an interest rate lower than 3% given the additional benefits on borrowing to invest, etc.

My personal mentality on the subject is to invest in assets of similar types with the money mediate the risk a bit. Example as ercchry mentions buying additional real estate that would allow you to have a couple of cash flowing homes and pay off all of the mortgage in 10 years with the right plan. Or if you do not want to be a land lord look at other hard assets such as gold, silver, diamonds, etc, so that worst case scenario to have a tangible asset you can actually increase in value. Do the research, I personally believe in and love real estate, but I have been looking into silver and diamonds lately as well. The nice thing about the later is 1 ounce of silver/gold still buys the same amount of product today as 1 ounce of silver/gold bought 100 years ago unlike cash.

Cheers and good luck with which ever road you decide to take!

Todd

[tpurcell4]

I apologize for my grammatical issues in my above response. I'm trying to multi-task right now!

[Xtrema]

If you have $220K of equity, you can have a Heloc of about $140K.

Heloc's interest isn't amortized for 25 years and repayment is more flexible (interest only). It's cheaper way to go.

And if your are coming off a 5 year (I assume 4%) mortgage and into a 2.9%, you definitely would have a smaller mortgage payment and the difference should at a minimum services the HELOC interest.

But as everyone said, there's no sure win in investing. It can go either way. Anything that's sure don't pay more than 3.5% which is most likely what your HELOC rate would be.

In most cases, especially for primary residence, you don't want a mortgage. Amortize loans are the most expensive type of loans.

[G]

^Doesn't sound like he wants to take on increase expenses that is why he wants to refi to 25 years to keep the payments about the same. If he uses a heloc he will have to make minimum interest payments on top of this regular mortagage payment.

[DTTB_36]

Look at this site, it goes into a bit of details about borrow from HELOC for investments. The tax benefits, strategies etc. It isnt about the investments youchoose though.
http://www.milliondollarjourney.com/...egy-part-1.htm

[benyl]

If it was me, I would:

#1 Stay on the same payment and 15 year amortization.
#2 Double my payments (or what ever you can afford).

Pay it all off in 4-7 years taking advantage of the low interest rates we have now (they can only go up).

After having the house paid off, put the mortgage payment into account for investing and profit all the while knowing that you will always have a roof over your head.

Gambling your home, your wife's home and your kids home is a bad move.

Imagine not having to make a mortgage payment. Sounds like financial freedom to me.

[heavyfuel]

Fuck I actually read all of that and tried to understand it, just can't.


Holy fuck.

[Sugarphreak]

...

[willbe1]

Originally posted by Sugarphreak
My advice... get a Heloc for "renovations" for as much as you can, but don't use it.

Then 3 or 4 years from now when everything is failing apart and the sky is falling... buy shit. Cheap cars, cheap houses, cheap stocks, cheap commodities. Everybody will be panicking to sell and you will have unbelievable leverage.

Agree

[tpurcell4]

Originally posted by Sugarphreak
My advice... get a Heloc for "renovations" for as much as you can, but don't use it.

Then 3 or 4 years from now when everything is failing apart and the sky is falling... buy shit. Cheap cars, cheap houses, cheap stocks, cheap commodities. Everybody will be panicking to sell and you will have unbelievable leverage.

Keep in mind that as of November 2012 the rules around home equity lines of credit changed to where you must have at least 35% equity remaining in the property (65% loan to value) for lines of credit.

There are a couple of ways to structure the total mortgage to get up to 80% LTV, however you will be limited on how much you can pull out if you want it all on a line of credit.

Cheers,

Todd