You Own Your Home Outright. Now What?

Somebody says it at every gathering out here, and they have earned the right to: "We own the house outright. We do not need a mortgage." Thirty years of payments, done. Good for you. I mean that.

Now here is the part nobody says at the gathering. That house in High River or Okotoks is probably worth somewhere between five hundred thousand and a million dollars, and every dollar of it is doing exactly two things: growing with the market, and protecting you. Both of those matter. What it cannot do is move. You cannot spend a bedroom.

So this is not a post telling you to borrow against your home. It is a post about the question to ask before you ever consider it - and an honest look at what people around here actually use their equity for when the answer is yes.

What is the equity actually for?

I have been arranging mortgages since 1999, and I have watched people take equity out for reasons that changed their family's life, and for reasons they regretted by the second statement. The difference was never the rate. It was whether they could answer that question before they called me.

What do people around here actually use their equity for?

1. A child's down payment

By a wide margin, the most common reason a mortgage-free parent in the Foothills calls me. A gift of $50,000 to $100,000 turns a kid's "someday" into an approval - and a gift from a parent's own equity is a clean, lender-accepted down payment source. The mechanics: a small mortgage or a line of credit on your home, a gift letter, done. The trap: gifting more than you can comfortably carry the payment on, because the gift is permanent and the payment is yours.

2. Staying in the home you love

A main-floor bedroom. A walk-in shower. A garage you can actually get the truck into in January. The renovation that lets you stay another fifteen years is usually cheaper than the move it prevents, and financing it against equity is usually far cheaper than a retail loan. The trap: renovating for resale value instead of for the way you actually live.

3. A rental or a second property

Equity as the down payment on a revenue property, or on the place at the lake. Real strategy, done every month, with its own lender rules. The trap: treating rent as guaranteed. It is not, and the mortgage payment is.

4. A business

Self-employed people out here fund inventory, equipment and slow seasons against their homes all the time. It can be the cheapest capital you will ever get. The trap: mixing personal and business borrowing so nobody - including your accountant - can tell what paid for what.

5. Investing - carefully, and not on my say-so

Yes, some people borrow against a paid-off home to invest. I wrote about the mechanics earlier this fall, including the tax rule most people get backwards (interest is deductible only in a non-registered account that earns income - not a TFSA, not an RRSP). I arrange the borrowing side. I do not pick investments or quote returns, and I will not tell you whether to do this. That is a conversation for you and your advisor - and if you have one, bring them in before you bring me in. The full post is here.

If you are 55 or older, read this part twice

There are two ways to access equity in a paid-off home, and they are not interchangeable.

• A line of credit or a small mortgage gives you the lowest cost of borrowing. It also gives you a payment - every month, for as long as the balance is there, from a fixed income. For some people that is fine. For a lot of retirees it is exactly the thing they spent thirty years getting rid of.
• A reverse mortgage costs more per year and gives you no payment at all. You keep title, you stay in the home, and the balance is settled when you sell, move out or pass. For someone who wants the money and does not want the payment, that is the design. The honest version is here, myths included.

Which one fits is a fifteen-minute conversation, and it is a better one with your adult children in the room. I welcome that. I would rather answer their questions now than have them wonder later.

What I will not do

I will not tell you your equity is wasted. It is not. I will not tell you to borrow against it. That is your decision. What I will do is tell you what it costs, which structure fits what you are trying to do, and - if the answer to "what is it for" is a good one - build it properly. If the answer is "I am not sure," I will tell you to leave it alone, and I will mean it.

The move for this week

Nothing, unless you have an answer to the question. If you do - the kid, the renovation, the property, the business, or a plan you have already built with your advisor - call me and I will give you the real number on what it would cost. Free, fifteen minutes, and it commits you to nothing.

Three questions I get on this