Your home is a great investment. But not for the reasons you think.
If I can show you a way to increase your net worth by up to $127,500 over the next five years and all you would have to pay is approximately $440/month to do it, would I get your attention?
Let me share an example.
Let’s say your existing home is worth $750,000 right now and there is a small existing mortgage, or no mortgage at all. (This does work with higher existing mortgage balances).
If you were to put a $100,000 mortgage on the home with an amortization of 25 years at the current variable rate as low as $1.45% today, it would generate a monthly payment of approximately $397/month. Now to be realistic, over the next 5 years, the variable rate is expected to climb based on what the so-called experts are saying. So, let’s account for that and say that by the time the 5 years is up, the variable rate could be as high as 3.05%. By the way, the Bank of Canada has already stated that they do not expect to raise the rates much before the Summer or Fall of 2022. Also, when they raise them, they typically raise them 25 basis points at a time, so it is gradual.
Please see the calculations below to further illustrate the example. Figures are approximate.
Home Value – $750,000 + 2%/year of natural appreciation = $828,000 approximate home value in 5 years from now, a gain of approximately $78,000.
Mortgage of $100,000 @ an average variable rate of 2.3% (1.45% now increasing to approx. 3.05% by end of term) over the 5-year term, with an average payment of $440/month. Total of monthly payments would be approximalty $26,400.
The $100,000 will be invested at an average rate of 6%, which is very achievable in today’s investment markets, using a combination of stocks, GIC’s or balanced mutual funds. This $100,000 investment should yield an approximate return of $33,820 in the 5 years.
The mortgage would generate an interest cost of approximately $10,630, and after the 5 years, the remaining mortgage balance would be approximately $84,314.
At this point, you have options.
Renew the mortgage, keep the money invested and keep going and earn even more going forward.
Renew the mortgage but take the profits from the investment and stay invested.
Or if you wanted to pay out the mortgage with the invested money, you can do that as well.
$133,820 – $84,314 = $49,506 payable to your bank account.
After Year 1
Home Value = $765,000. Investment Value = $106,000. Mortgage Balance = $97,005
After Year 2
Home Value = $780,300. Investment Value = $112,360 Mortgage Balance = $93,941
After Year 3
Home Value = $795,900. Investment Value = $119,101. Mortgage Balance = $90,805
After Year 4
Home Value = $811,800. Investment Value = $126,247. Mortgage Balance = $87,597
After Year 5
Home Value = 828,000. Investment Value = $133,822. Mortgage Balance = $84,314
Net Worth at the beginning of year 1:
Assets = $750,000. (-) Liabilities = $0. = Net Worth $750,000
Net Worth after year 5:
Assets = $828,000 + $133,822 = $961,822. (-) Liabilities = $84,314 = Net Worth $877,508
Gain in Net Worth = $127,508
Remember, assumptions are that the variable rate will increase in the amount of 150 basis points over the next five years. If the rate goes up slower, or not as high, that increases your return. If the invested money earns an annualized rate of higher than 6%, your returns would be higher. And finally, if your home goes up in value at a faster pace than 2% per year, your overall net worth would be higher.
Remember, the $440/month payment is an investment payment, not a debt payment!
And you have your homes equity to thank for it!
If you have any unused RRSP or TFSA contribution room available, or borrow more than $100,000, this scenario becomes even more attractive. All depends on what you would like to invest monthly.
Let me know if this looks like something that you would benefit from. Everyone’s situation is different, and I would be happy to help you see if this is something that could work for you.