Be it at the home purchase stage which means making the smallest down payment possible, or refinancing and taking out the maximum amount of equity, many Canadians today believe that they should have the largest possible mortgage.
It seems that gone are the days of working to retire debt free, and to own your home out-right. It is this exact reason that the government has restricted the rules around mortgage lending, to try to curb the attitude that our homes are ATM machines.
We tend to forget that a mortgage is essentially assigning title to the home or granting ownership of the home to a lender. Yes, equity remaining in the home is ours and we benefit from increased value, but we do not truly own that home until it is debt free. If we do not pay the mortgage, the lender has the ability to remove us from the home. For people who took advantage of 100% financing, until they are in a positive equity situation, they are in truth renting that home as the money they are ‘investing’ is paying off debt.
In some situations maximizing the equity in your home might make sense. With a structured investment plan in place, you can make that equity work for you. But it is also important to remember that mortgage interest is calculated as compounded interest. I have yet to see an investment plan that so favours the investor by paying a return that is compounded at the same rate. That is not to say that using equity as an investment tool is not smart, it just means that we have to be careful to place our funds in the right investment.
The same applies to using equity in your home for home improvements. A renovation can dramatically increase the value of your home, but then also consider a few things before you proceed. Are you doing the renovations in order for the home to better function for you and your family or are you doing it simply to increase value? What are your plans with the home – live out your days there, or sell in the next five years? All of these questions and many others need to be taken into account before you make the decision to move forward.
If you want to renovate your home because you want to improve functionality or better enjoy the aesthetics of the home; your choices in finishes might be very different then if it is to get the home ready for sale. For instance: I once saw a home for sale in a middle class neighbourhood which proudly advertised that the kitchen sink was a unique high end designer brand. Out of curiosity I went online and looked it up… I was shocked to discover that the sink came with a price tag of just over $6,000.00 Canadian. I also found a sink that looked almost identical for $900.00.
I can’t speak for everyone but I just can’t justify in my mind paying six thousand dollars on a sink, as I am sure most people would agree. The point is, renovations need to make sense and need to fit the home and the neighbourhood if it is your intention to simply increase the value.
This is where speaking to professionals comes into play and illustrates the need to have someone who is truly Looking out for your best interest. Be it consulting with a design professional, a realtor, investment advisor or a mortgage broker – we need to make sure that our decisions make sense for our own personal situations. It is why shopping for a mortgage by only comparing interest rate can seriously impact our financial situation in the future.
Home ownership needs to be about much more than having the biggest and best home or a mortgage with the lowest interest rate, it has to make sense and align with our lifestyle and financial goals. We need to be smart about the decisions we make today to better prepare for our future. It is why at Centum Mortgage Choice we encourage you to look beyond just getting a mortgage and getting a home ownership solution.
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