With the recent rise in home values, many homeowners have become "rich" on paper. How do you put this new wealth to work?
From February 2020 to February 2021, the median price of single-family homes in Quebec rose to $336,670 from $274,700 in 2020, an increase of 23% in just one year. In practical terms, this means that the owner of a home that was worth $274,700 at the beginning of 2020 is $61,970 richer, thanks to the price increase alone.
If you're open to opportunities, here's a great one: it's possible to go to your bank and borrow against your new property value. Here are six ways to use such a loan.
If you're open to opportunities, here's a great one: it's possible to go to your bank and borrow against your new property value. Here are six ways to use such a loan.
1. Transferring high-interest debt
If you have an outstanding credit card balance or a personal loan, you could transfer these debts to your mortgage, which has a lower interest rate. However, you will have to be disciplined afterwards and avoid going back into debt.
An alternative would be to sell your home, use some of the profit from the resale to pay off your debts, and then buy a less expensive property.
If you have an outstanding credit card balance or a personal loan, you could transfer these debts to your mortgage, which has a lower interest rate. However, you will have to be disciplined afterwards and avoid going back into debt.
An alternative would be to sell your home, use some of the profit from the resale to pay off your debts, and then buy a less expensive property.
2. Financing renovations
To make it financially worthwhile, it's best to prioritize work that conserves the building, such as re-roofing, followed by renovations that increase the value of your home, such as kitchen and bathroom renovations.
Some renovations, such as adding a pool, have little effect on the value of a property.
You should also consider the price of materials. When prices are high, as they are now, it may be better to postpone some non-urgent work.
To make it financially worthwhile, it's best to prioritize work that conserves the building, such as re-roofing, followed by renovations that increase the value of your home, such as kitchen and bathroom renovations.
Some renovations, such as adding a pool, have little effect on the value of a property.
You should also consider the price of materials. When prices are high, as they are now, it may be better to postpone some non-urgent work.
3. Increase your investments
You can borrow against the value of your home to maximize certain investments, such as your RRSP.
This strategy has two advantages: first, when interest rates are low, as they are now, your RRSPs can earn a higher return than your mortgage costs. Also, contributing to your RRSP reduces your taxable income.
You can borrow against the value of your home to maximize certain investments, such as your RRSP.
This strategy has two advantages: first, when interest rates are low, as they are now, your RRSPs can earn a higher return than your mortgage costs. Also, contributing to your RRSP reduces your taxable income.
4. Financing the acquisition of a cottage or a building
Have you been dreaming of owning a cottage for a while? The added value of your home could help you finance your dream. For a profitable purchase, you could even opt for a cottage offered for rent (for the days you are not there), or for an income property.
Have you been dreaming of owning a cottage for a while? The added value of your home could help you finance your dream. For a profitable purchase, you could even opt for a cottage offered for rent (for the days you are not there), or for an income property.
5. Lend money
If you are a little more daring, you can even use the value of your home to lend money by becoming a private lender. This strategy requires you to seek out some knowledge, but it can pay off in the long run.
If you are a little more daring, you can even use the value of your home to lend money by becoming a private lender. This strategy requires you to seek out some knowledge, but it can pay off in the long run.
6. Spoil yourself
I recommend avoiding this last option, as the trap is twofold. On the one hand, you could impoverish yourself by buying things that don't increase in value (and even lose value) and on the other hand, the possibly inflated value of your home could go down. In short, if you want to afford a little luxury, it is often better to be able to pay cash for the expense.
I recommend avoiding this last option, as the trap is twofold. On the one hand, you could impoverish yourself by buying things that don't increase in value (and even lose value) and on the other hand, the possibly inflated value of your home could go down. In short, if you want to afford a little luxury, it is often better to be able to pay cash for the expense.
TIPS
- If you are borrowing against the value of your home, it is ideal to do so with the goal of creating value.
- Beware: It is not possible to refinance more than 80% of the market value of your home.
- To find out if it's worth borrowing, do the math. Remember that you will not only have to pay back your new loan, but also pay the interest on it and possibly various fees charged by your financial institution.
Source : Article by Ghislain Larochelle on the website journaldequebec.com on 12th July of 2021
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