Equity on a House

[katrinastouch]

I live in Canada, and I own a house with $50,000 mortgage when my 5 years mortgage expired in July 2008. We bought the house in 2002 and double the maximum allowed, and pay by weekly. In July 2008, I am planning on using some of our equity on the house to invest in one of my stocks that pay 0.228 dividend consistently every 3 months. Is it a good investment strategy and will it be like opening a second mortgage? I am thinking of borrowing $100,000 againts our equity (our equity is around $600,000.)

 

[caru423]

I am not sure what the housing market is like in Canada, but I can assure you that taking the equity from your home to speculate in the financial markets is not good. I would suggest that instead of doing this you look into a new type of loan program for the remaining balance on you home. If you use a rapid amortization software or european type of mortgage it will be much more effective then making a bi weekley or bi monthly payment. There will be savings in interest and in paying off principal faster. These funds can be used for your stock speculation. It might not sound pretty but it is safe and will provide the soulution you need.

 

[subban]

Quote from katrinastouch:

I live in Canada, and I own a house with $50,000 mortgage when my 5 years mortgage expired in July 2008. We bought the house in 2002 and double the maximum allowed, and pay by weekly. In July 2008, I am planning on using some of our equity on the house to invest in one of my stocks that pay 0.228 dividend consistently every 3 months. Is it a good investment strategy and will it be like opening a second mortgage? I am thinking of borrowing $100,000 againts our equity (our equity is around $600,000.)

Bad time to be taking equity out of your house. House prices are declining. Every where I hear the housing recession won't be over till 2009 - 2010. But on the flipside interest rates are still pretty low overall. What kind of interest rate will you be getting? What is monthly payment versus return on divend? I don't think its such a great idea to be borrowing all that money to just put into one stock. Even with low beta stocks, you never know whats going to happen. Which stock are you thinking of investing in?

 

[nutmeg]

I say go for it. We get a tax write off on the interest in the US, equity is dead money. Diversify. Take some of the money out of your real estate and put it in the market, plus you get a little leverage with the margin.

 

[AAA30]

Unfortunately we do not get to write off our mortgage interest here in Canada. But since you have considerable equity in you home it may be worth while for you to leverage up. This of course depends on you age, when you want to retire and the stability of your income . You also have the option of loaning yourself the money out of your RRSP, this way you can shelter the tax on interest you pay to yourself till you retire kind of like a forced savings plan. If you hold the loan outside your RRSP your the rate you pay would be r*(1-tax rate) to account for he tax shield. These loans have to be set up a certain way for Revenue Canada so If you do not know how already seek out some professional advice.
I would also suggest if you want to hold this investment for the long term to diversify it over up to ten securities that are not highly correlated.

 

[black diamond]

How long are you going to live there? IMHO if you are comitted to staying indefinitely and would be willing buy the stock on margin anyway this might be your best source of financing. Otherwise probably too risky, having to move when you have negative equity would really suck.

I did this with some "safe" preferred stocks and discount bond closed end funds a while back, but only b/c low rates plus the tax deduction made it possible to do with conservative stuff.