Comments on: Making Money with Your Mortgage - Part 2 http://www.johnchow.com/making-money-with-your-mortgage-part-2/ The Miscellaneous Ramblings of a Dot Com Mogul Wed, 01 Oct 2008 00:22:16 +0000 http://wordpress.org/?v=2.6.2 By: Jamie http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-31564 Jamie Fri, 02 Feb 2007 06:45:48 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-31564 I think you would be much safer investing the excess cash (from the would be mortgage payment) in a fund that guaranteed 7% and carries no risk. Yes, less risk usually means less profit. But, I think taking a 300k loan out and playing on the edge is a bit risky for most folks. I think you would be much safer investing the excess cash (from the would be mortgage payment) in a fund that guaranteed 7% and carries no risk. Yes, less risk usually means less profit. But, I think taking a 300k loan out and playing on the edge is a bit risky for most folks.

]]> By: Blair http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-24613 Blair Mon, 15 Jan 2007 02:27:19 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-24613 I'm not going to argue with your 5 year plan just yet, but five years is a very short time. You are exposed to market risk over the five year period as has already been pointed out. My problem is with your extrapolation to 10 and 20 (!) years. After the five year period is up, you are not only exposed to market risk and real estate risk, but you are also exposed to interest rate risk. What will mortgage rates be in 5 years when your fixed term is up? You're creating a scheme using the average return of the TSX, and the current near-historic lows of interest rates. If you use the average market return, you should at least consider the average mortgage rate. Since 1979, that rate is about 10% (http://www.mississauga4sale.com/rates.jpg), mostly due to the high rates in the 80s and early 90s. (Note you can also remember the 80s by the real estate crashes.) Consider your home investment plan carefully under those types of "average" conditions. Forget for the moment how careful you have to be when using averages. Just consider your 10% average return on your portfolio, and the 10% average rate on home mortgages, plus friction due to taxes and either rebalancing costs under a do-it-yourself plan or index-fund annual costs. Really all you've done is sold yourself out of real estate, gone short on interest rate and bought equity. It might work, or it might not. It's a bet on the future returns of at least three risk classes. Furthermore, if interest rates do go up, people tend to dump equity and buy fixed income products. This causes downward pressure on your index. The same correlation that makes your plan look so good now makes it look so bad under alternate, but realistic market conditions. You'll have a hard time making money on the flying interest rate products while paying interest on a loan, so you can't win. The downside of your plan is that over the first five years, interest rates rise causing downward pressure on the index. Over only 5 years, this is a real risk. You'll come out at a loss, and if you're lucky, you can eat that loss and unwind yourself from a plan failing due to market conditions you bet against. Remember, if you look at the market hard enough, it usually starts to look efficient. I’m not going to argue with your 5 year plan just yet, but five years is a very short time. You are exposed to market risk over the five year period as has already been pointed out. My problem is with your extrapolation to 10 and 20 (!) years. After the five year period is up, you are not only exposed to market risk and real estate risk, but you are also exposed to interest rate risk. What will mortgage rates be in 5 years when your fixed term is up? You’re creating a scheme using the average return of the TSX, and the current near-historic lows of interest rates. If you use the average market return, you should at least consider the average mortgage rate. Since 1979, that rate is about 10% (http://www.mississauga4sale.com/rates.jpg), mostly due to the high rates in the 80s and early 90s. (Note you can also remember the 80s by the real estate crashes.) Consider your home investment plan carefully under those types of “average” conditions. Forget for the moment how careful you have to be when using averages. Just consider your 10% average return on your portfolio, and the 10% average rate on home mortgages, plus friction due to taxes and either rebalancing costs under a do-it-yourself plan or index-fund annual costs.

Really all you’ve done is sold yourself out of real estate, gone short on interest rate and bought equity. It might work, or it might not. It’s a bet on the future returns of at least three risk classes.

Furthermore, if interest rates do go up, people tend to dump equity and buy fixed income products. This causes downward pressure on your index. The same correlation that makes your plan look so good now makes it look so bad under alternate, but realistic market conditions. You’ll have a hard time making money on the flying interest rate products while paying interest on a loan, so you can’t win. The downside of your plan is that over the first five years, interest rates rise causing downward pressure on the index. Over only 5 years, this is a real risk. You’ll come out at a loss, and if you’re lucky, you can eat that loss and unwind yourself from a plan failing due to market conditions you bet against. Remember, if you look at the market hard enough, it usually starts to look efficient.

]]> By: Will http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-15808 Will Fri, 22 Dec 2006 03:51:35 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-15808 Some interesting comments here: For those who are interested in this strategy, as indicated, I would reccomend to discuss with a "Trusted" Financial Planner. You will find companies, such as TD Canada Trust, B2B Trust and AGF Trust who will actually offer Leveraged Loan programs WITHOUT the need to use your house as security. They have 100% Loans with No Margin calls, where they will lend up $$'s to individuals to invest in Mutual Funds. If you are someone who is contributing to a RSP (Canadian version of 401K) you may want to consider a Leveraged loan instead. Do the math on Capital Gains vs. 100% taxable income on RSP at retirement, along with less restrictions on when you take the income (69 years old converting to a RRIF)both have the same Tax savings available. The Leverage will be higher risk, but as mentioned, if you have a long term time horizon, many of the "Risks" are diminished over 10 - 20 years. Also strongly reccommend to refer to Talbot Stevens website at: www.TalbotStevens.com for some more information. Some interesting comments here: For those who are interested in this strategy, as indicated, I would reccomend to discuss with a “Trusted” Financial Planner. You will find companies, such as TD Canada Trust, B2B Trust and AGF Trust who will actually offer Leveraged Loan programs WITHOUT the need to use your house as security. They have 100% Loans with No Margin calls, where they will lend up $$’s to individuals to invest in Mutual Funds. If you are someone who is contributing to a RSP (Canadian version of 401K) you may want to consider a Leveraged loan instead. Do the math on Capital Gains vs. 100% taxable income on RSP at retirement, along with less restrictions on when you take the income (69 years old converting to a RRIF)both have the same Tax savings available. The Leverage will be higher risk, but as mentioned, if you have a long term time horizon, many of the “Risks” are diminished over 10 - 20 years.
Also strongly reccommend to refer to Talbot Stevens website at: http://www.TalbotStevens.com for some more information.

]]> By: David G. Lopez http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-9604 David G. Lopez Mon, 27 Nov 2006 13:24:59 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-9604 From the irs website Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. Home equity debt is a mortgage you took out after October 13, 1987, that: * Does not qualify as home acquisition debt or as grandfathered debt, and * Is secured by your qualified home. Example. You bought your home for cash 10 years ago. You did not have a mortgage on your home until last year, when you took out a $20,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. This loan is home equity debt. Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of: * $100,000 ($50,000 if married filing separately), or * The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. From the irs website

Home Equity Debt

If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt.

Home equity debt is a mortgage you took out after October 13, 1987, that:

*

Does not qualify as home acquisition debt or as grandfathered debt, and
*

Is secured by your qualified home.

Example.

You bought your home for cash 10 years ago. You did not have a mortgage on your home until last year, when you took out a $20,000 loan, secured by your home, to pay for your daughter’s college tuition and your father’s medical bills. This loan is home equity debt.
Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:

*

$100,000 ($50,000 if married filing separately), or
*

The total of each home’s fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.

]]> By: David G. Lopez http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-9596 David G. Lopez Mon, 27 Nov 2006 12:12:40 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-9596 well said Neal. Out all the comments, it's all about risk. How much risk are you willing to take? We all have to do what's comfortable to us. well said Neal. Out all the comments, it’s all about risk. How much risk are you willing to take? We all have to do what’s comfortable to us.

]]> By: Neal http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-5183 Neal Tue, 24 Oct 2006 05:15:17 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-5183 John, excellent analysis. I wanted to remind some of the posters that ANY investment contains risk. Without risk there can be NO profit. You can always manage the level of risk by your choice of investment. If a 10% average return fund is too risky, then choose a lower risk, lower return fund. By the way, I am using lower risk to mean lower volatility. Different investors can handle different risks. Investing in emerging markets keeps some people awake at night. That just means all investments are not right for all investors. I hope no one is suggesting that emerging markets should be off limits since they could decline by 40% next year. While they may decline by 40% in a year, the use of emerging markets in a portfolio hardly amounts to gambling. Also, it's not too difficult to achieve a high enough return to make this strategy successful. Anyone in a 33% tax bracket (combined federal/state/local) will have an effective interest rate of only 4% on a 6% home mortgage loan. There are plenty of low risk investments that should beat 4% over 5 years. Of course profit will be less if the return is lower, but as John keeps pointing out, I'm paying nothing out of my pocket for the return. I've been implementing similar strategies for a few years with credit cards that offer interest rates in the 0% to 4% range. Of course, with my credit card approach and with your home mortgage approach there are plenty of details to master, but this is a natural part of any investment. It's true that in the U.S. only interest on the first $100,000 would be deductible, and the credit card interest I pay may not be deductible, and there are often loan fees to pay, but it's still a beautiful strategy when implemented properly. For the creative and motivated investor, there are plenty of tweaks to overcome all these issues. Not everyone has a $400,000 home anyway, especially in the Southest U.S. where I live. A $100,000 implementation is still a sizeable investment that can lead to a significant nest egg in retirement. If nothing else, it is a forced retirement savings plan. Bravo! John, excellent analysis. I wanted to remind some of the posters that ANY investment contains risk. Without risk there can be NO profit. You can always manage the level of risk by your choice of investment. If a 10% average return fund is too risky, then choose a lower risk, lower return fund. By the way, I am using lower risk to mean lower volatility.

Different investors can handle different risks. Investing in emerging markets keeps some people awake at night. That just means all investments are not right for all investors. I hope no one is suggesting that emerging markets should be off limits since they could decline by 40% next year. While they may decline by 40% in a year, the use of emerging markets in a portfolio hardly amounts to gambling.

Also, it’s not too difficult to achieve a high enough return to make this strategy successful. Anyone in a 33% tax bracket (combined federal/state/local) will have an effective interest rate of only 4% on a 6% home mortgage loan. There are plenty of low risk investments that should beat 4% over 5 years. Of course profit will be less if the return is lower, but as John keeps pointing out, I’m paying nothing out of my pocket for the return.

I’ve been implementing similar strategies for a few years with Credit Cards that offer interest rates in the 0% to 4% range. Of course, with my Credit Card approach and with your home mortgage approach there are plenty of details to master, but this is a natural part of any investment.

It’s true that in the U.S. only interest on the first $100,000 would be deductible, and the Credit Card interest I pay may not be deductible, and there are often loan fees to pay, but it’s still a beautiful strategy when implemented properly. For the creative and motivated investor, there are plenty of tweaks to overcome all these issues.

Not everyone has a $400,000 home anyway, especially in the Southest U.S. where I live. A $100,000 implementation is still a sizeable investment that can lead to a significant nest egg in retirement. If nothing else, it is a forced retirement savings plan.

Bravo!

]]> By: Mario http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-5156 Mario Mon, 23 Oct 2006 19:33:42 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-5156 John, sounds like an interesting approach. One question (within Canada) ...what if you borrow the HELOC from yourself in the form of borrowings from a Self-Directed RRSP? This would increase your wealth further as the interest payments you make are to yourself, in a tax-deferred RRSP. John, sounds like an interesting approach. One question (within Canada) …what if you borrow the HELOC from yourself in the form of borrowings from a Self-Directed RRSP? This would increase your wealth further as the interest payments you make are to yourself, in a tax-deferred RRSP.

]]> By: Sean http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-3924 Sean Tue, 03 Oct 2006 05:12:14 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-3924 Thanks for pointing this out John, I've got the ball rolling with a financial planner on this. I'm young and probably less risk averse than most, this seems like a great way to leverage and reduce my tax burden. I don't know about dumping the money into the stock market or even real estate as this point in the Vancouver market, much more comfortable investing the money in my own business ventures - a 10% return, heck 25% return, is easily achievable! Thanks for pointing this out John, I’ve got the ball rolling with a financial planner on this. I’m young and probably less risk averse than most, this seems like a great way to leverage and reduce my tax burden. I don’t know about dumping the money into the stock market or even real estate as this point in the Vancouver market, much more comfortable investing the money in my own business ventures - a 10% return, heck 25% return, is easily achievable!

]]> By: John Chow http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-3617 John Chow Thu, 28 Sep 2006 22:58:21 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-3617 Chris - Very good but you're forgetting one thing. In your example, you have to take $3,500 out of your pocket each month. Zero comes out of mine and that $3,500 saved can be used for what-ever-the-hell I fell like. Of course there is nothing preventing you from doing both at the same time. :) Chris - Very good but you’re forgetting one thing. In your example, you have to take $3,500 out of your pocket each month. Zero comes out of mine and that $3,500 saved can be used for what-ever-the-hell I fell like.

Of course there is nothing preventing you from doing both at the same time. :)

]]> By: Chris http://www.johnchow.com/making-money-with-your-mortgage-part-2/#comment-3614 Chris Thu, 28 Sep 2006 21:33:18 +0000 http://www.johnchow.com/index.php/making-money-with-your-mortgage-%e2%80%93-part-2/#comment-3614 Interesting. I like to run these things through the "what would Dave (Ramsey) do?" ringer... Their house payment should be around $3500, assuming that they put 10% down and had a 15 year fixed mortgage (that's what Dave would do). Now that the house is paid off (it was paid off to begin with, remember?) they have that payment that they can apply to this investment. Hmmm... $3500 each month at 10% (your number, not mine) comes to just over 2.5 million over the same 20 years. AND YOUR HOUSE IS PAID FOR. Read this guy's blog for the car comments, not the financial advice. Interesting. I like to run these things through the “what would Dave (Ramsey) do?” ringer…

Their house payment should be around $3500, assuming that they put 10% down and had a 15 year fixed mortgage (that’s what Dave would do). Now that the house is paid off (it was paid off to begin with, remember?) they have that payment that they can apply to this investment. Hmmm… $3500 each month at 10% (your number, not mine) comes to just over 2.5 million over the same 20 years. AND YOUR HOUSE IS PAID FOR.

Read this guy’s blog for the car comments, not the financial advice.

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