Borrowing against home to invest
My husband and I are currently looking at obtaining a line of credit against our home and investing it with the help of our financial planner. My husband is turning 51 and I will be turning 50 this year. I am unemployed at this time.
We currently have approximately $100,000 in our RRSPs distributed fairly evenly between the two of us. We are now wanting to invest in a non-registered plan (my husband’s RRSP is now capped) and are thinking of using our equity to do this. Our home is worth approximately $245,000. We have no mortgage and no other debt.
Do you think this will be a good idea? We can borrow at prime and pay interest only, which will be tax deductible, and hopefully our investments will increase in value over the next 10 to 15 years – faster maybe than if we had simply made a monthly investment of say $300.
We would appreciate and value any advice that you can give us at this time. – R.S.
A – Sigh! How quickly we forget! It was only five years ago (1999) that many financial advisors were suggesting that their clients use home equity loans to invest in a stock market that was going through the roof.hen came the crash of 2000 and the subsequent bear market that lasted almost three years. Many people suffered big losses and deeply regretted ever taking the risk. Advisors, of course, stopped recommending this action.
Now that the markets are looking good again, the idea is coming back into favour. My advice to you is to be very careful about going this route and to clearly understand the risks inherent in leveraging. Yes, you can magnify your gains. You can also magnify your losses.
If you do decide to go ahead, I suggest you choose securities with limited downside risk. Conservatively-managed equity funds that were able to come through the bear market with minimal losses would be well worth considering. Avoid anything speculative. If things go sour, those securities will take the biggest hit. – G.P.