Tag Archives: home equity

Top 3 benefits of investing in Real Estate

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Image by unspash/Blake Wheeler

 

Special to the Financial Independence Hub

Learning how to invest your money at an early age can set you up for success in the future. One of the most popular ways to invest is through real estate. This will allow you to earn a cash flow outside of your regular 9–5. However, many take this up as a full–time gig if they find it more appealing or successful than their typical job.

The benefits of real estate investing are almost countless, but there are a few that stand out from the rest. Let’s take a closer look at the top three benefits of real estate investing:

Buying is Cheaper than Building

If you plan to start your investment route in real estate, you’ll find that buying a home is typically much cheaper than building. Start by figuring out how much house you can afford and then apply for the proper mortgage. The process is relatively simple, especially with the help of a real estate agent.

The waiting game starts here, but compared to the length of time a home build is, this process is much shorter. Once your offer on the home has been accepted, you can then decide what you plan to do with the house; whether it’s to earn passive income, live in it, or both. Either way, your home’s equity will begin to grow. The only difference between the two is making money on the home on a consistent basis or collecting the equity of your home once you sell.

Earning Passive Income

In recent years, finding new ways to earn passive income has been a very popular side hustle. Especially for young adults, this is a great way to earn money while also working a full–time job. Check out our top 3 ways to start real estate investing to help you choose which route you want to take. Whether you choose to rent the home out monthly or are considering the flip and sell method, you can earn a significant amount of passive income. Continue Reading…

3 reasons baby boomers should downsize early

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By Keisha Telfer

Special to the Financial Independence Hub

For empty nesters and baby boomers who are planning for their future, this year in particular makes it worth thinking about downsizing early. Downsizing is a proactive, planned transition, leveraging the equity in your home to fund your new lifestyle and renewed purpose, and there are many benefits to having this conversation in 2021.

The key takeaway from the current market situation – driven by the pandemic – is that larger homes are in demand. Now is the perfect time to get started talking about downsizing, and here is why:

1.) Downsizing early is the new way to upsize life

Downsizing is not just a transaction, it’s a transition:  a transition to a new phase of life. Baby boomers who downsize early are able to upsize and experience life on their own terms. While selling the family home comes with its own emotional and physical hurdles, the payoffs of being able to leverage a lifetime of equity and gain years of adventure and freedom are worth it. Downsizing early means there is plenty of time to plan the transition, rather than waiting until life events make the choice for you. One of the top questions I get asked is, “When should I start thinking about downsizing?,” and my answer is “Today.”

 2.) A hot market for detached homes

The pandemic has driven young families to look for bigger homes, many of which are family homes currently owned by the baby boom generation.  Although finances are only one aspect of transitioning to a new phase in life, the increase in demand and prices for detached homes across Canada means there is an added incentive to consider it in 2021.  With the recent increase in younger families purchasing detached homes, baby boomers have the opportunity to sell their homes in a sellers’ market and come out ahead. Continue Reading…

Master your Mortgage for Financial Freedom

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By Michael J. Wiener

Special to the Financial Independence Hub

Many people have heard of the Smith Manoeuvre, which is a way to borrow against the equity in your home to invest and take a tax deduction for the interest on the borrowed money.

It was originally popularized by the late Fraser Smith, who passed away in September 2011.  Now his son, Robinson Smith, has written the book Master Your Mortgage for Financial Freedom, which covers the Smith Manoeuvre in detail for more modern times.  Smith Jr. explains the Manoeuvre and its subtleties well, but his characterization of its benefits is misleading in places.

The Smith Manoeuvre

In Canada, you can only deduct interest payments on your taxes if you invest the borrowed money in a way that has a reasonable expectation of earning income.  Buying a house does not have the expectation of earning income, so you can’t deduct the interest portion of your mortgage payments.

However, if you have enough equity in your home that a lender is willing to let you borrow more money, you could invest this borrowed money in a non-registered account and deduct the interest on this new loan on your income taxes (as long as you follow CRA’s rules carefully).  A common mistake would be to spend some of the invested money or spend some of the borrowed money.  If you do this, then some of the money you borrowed is no longer borrowed for the purpose of investing to earn income.  So, you would lose some of your tax deduction.

With each mortgage payment, you pay down some of the principal of your mortgage, and assuming the lender was happy with your original mortgage size, you can re-borrow the equity you just paid down for the purpose of investing and deducting any interest on this new loan.  Some lenders offer mortgage products with two parts: the first is a standard mortgage, and the second is a line of credit (LOC) whose limit automatically adjusts so that the amount you still owe on your standard mortgage plus the LOC limit stays constant.  So, after each standard mortgage payment, your LOC limit goes up by the amount of mortgage principal you just paid, and you can re-borrow this amount to invest and deduct LOC interest on your taxes.  This is the Smith Manoeuvre.

Smith describes a number of ways of paying off your mortgage principal faster (that he calls “accelerators”) so that you can borrow against the new principal sooner and boost your tax deductions.

Compared to a Standard Mortgage Plan

Ordinarily, mortgagors pay off their mortgages slowly over many years.  Their risk of losing their home because of financial problems is highest initially when they owe the most.  This risk declines as the mortgage balance declines, and inflation reduces the effective debt size even further.

With the Smith Manoeuvre, the total amount you owe remains constant (declining mortgage balance plus LOC balance) or may even increase as your house value increases and your lender is willing to lend you more money against your house.  So, your risk level as a function of how much you owe doesn’t decline in the same way as it does with the standard mortgage plan.  You could argue that your financial risk does decline somewhat because you’ve got your invested savings to fall back on in hard times, but your risk certainly doesn’t decline as fast as it does with the standard plan.

Leveraged Investing

Smith likes to say that the Smith Manoeuvre isn’t a leveraged investment plan.  He justifies this assertion by saying that you’ve already borrowed to buy your home, and you’re now slowly converting this mortgage that isn’t tax deductible to an LOC debt that is tax deductible. Continue Reading…

How much would the Home Buyers’ Plan help in your market?

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

For those trying to scrape together a down payment in Canada’s hottest housing markets, the Home Buyer’s Plan is known as an effective tool. Offered by the federal government, it allows first-time buyers to pull funds from the RRSPs completely tax-free to put toward their home down payment. If you’re lucky enough to have RRSP matching via your employer, or have been saving for retirement for some time, it can seem an especially attractive method to amass down payment funds.

However, there are a few restrictions buyers should be aware of:

  • Buyers must have a signed Agreement of Purchase and Sale to buy or build a property before applying to access the funds.
  • They can pull up to a limit of $35,000 from an individual’s RRSP, and up to a combined $70,000 from RRSPs held by two individuals buying together (assuming the funds are saved in the first place).
  • The funds must have been sheltered within the RRSP for a minimum of 90 days before they can be accessed.
  • Buyers are required to “pay themselves back”, contributing one fifteenth of the withdrawn amount on an annual basis over a 15-year timeline, or be taxed on that portion at their full rate.
  • Buyers must qualify as “first timers,” which the Government of Canada defines as not having owned a home, or occupied one that your spouse has owned, in the four consecutive years before this home purchase is made. (However, there are exceptions in the case of a marriage or common-law relationship breakdown where former partners can restore their first-time buyer status.)
  • Buyers must intend to dwell in the home as their permanent residence within one year of its purchase or completion.

How long would it take to actually save for the HBP?

Assuming a buyer satisfies all the criteria above, they also need to actually save the funds in the RRSP in order to use them for their home purchase: and that’s easier said than done in some urban centres than others.

To see how long it would take to actually set aside the maximum $35,000 in an RRSP, Zoocasa sourced individual income thresholds in 14 cities across the nation. The data was based on 2017 tax filings as reported by Statistics Canada, and assumed the income was earned income, eligible to create RRSP contribution room, and that individuals contributed the maximum to their RRSP annually (18% of earned income, to a maximum of $26,500). The study also compared how long it would take for those in the top 50%, 25%, and 10% income groups to save $35,000.
According to the findings, for a median-income household contributing the max amount to an RRSP, it would take between 4.3 – six years to pull together $35,000.

(See Infographic at the top of this blog).

How far would $35,000 go in your Housing market?

As well, the extent that the maximum HBP funds would actually aid in a home purchase varies across Canada; it’s no surprise that in the priciest markets, such as homes for sale in Toronto or Vancouver, that it’s hardly a drop in the bucket – just 4.3% and 3.5% of a benchmark home price, respectively. Continue Reading…

8 ways to build Home Equity

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Nanaimo, BC

By Lynn Donn

Special to the Financial Independence Hub

If you’ve been watching the real estate market in British Columbia, you may have noticed that quite a few Nanaimo homes for sale have a large amount of equity. Equity is the difference between the market value of your home and the mortgage balance owed. Another way of thinking about equity is that it’s the profit you make when the time comes to sell.

Building equity is the largest single benefit of owning a home in Nanaimo or anywhere else. Your home equity increases in one of two ways:

  • Value of your home increases
  • Amount of debt on your home decreases
Add value to your home

Here are eight great ways to build equity in your home by increasing value and decreasing debt:

You have instant equity in your home when home values appreciate. Three things that make home values rise are:

1.) Real estate market in Nanaimo is moving upward: Appreciation is something that happens without you having to do anything. Home prices are more likely to go up in established, attractive neighborhoods and in growing areas around town.

2.) Improvements and updating: Not all home improvements have the same return on investment. So, before spending money on updating, be sure to choose the ones that will add the most value to your home. Smart home improvements include kitchen and bathroom updating, improving curb appeal with low-maintenance landscaping, and adding square footage to your home.

3.) Upkeep & routine maintenance: Although routine maintenance can be tedious, it’s better to keep everything in your kept up than to face a major repair bill like a leaking roof or broken down furnace. Nanaimo homes for sale that have been maintained poorly are also at the biggest risk of losing equity, even when the real estate market is appreciating.

Decrease debt on your home

Decreasing the debt on your home while adding value can build equity surprisingly fast. Techniques to reduce mortgage debt include: Continue Reading…