In a free society, people can do whatever they want, so long as it’s within the law. However, that doesn’t necessarily mean everything is advisable!
Burke Financial will stress two things when recommending how to spend your money. On one hand, it’s your, and you can do whatever you want with it. On the other, some actions are riskier than others. Homeowners often tap into their property’s equity by taking out a home equity loan to get better borrowing terms than they’d get without using their home as collateral.
Let’s explore some of the worst ways you can use these funds.
Consolidating Debts Without Changing Behaviour
If you have runaway debt, it’s smart to use a home equity loan to consolidate debts. Such an approach lets you save money and streamline the process. Not only is paying multiple debts expensive, but juggling them can be difficult, and some may slip through the cracks.
If you consolidate your loans without altering what caused the problem in the first place, in a way, you’re just extending the problem. Some “debts” are better than others. It’s one thing if you’re in debt to pay for education, health emergencies, or other fundamentals.
Debts for things like gambling or high-end shopping are indulgences that most people can’t afford. Don’t take out a home equity loan to fund problematic habits, or you could stretch yourself thin and risk losing what you put up as collateral: your home.
The best advice from your mortgage broker involves using a home equity loan to invest in your home, so the home increases in value by more than the borrowing costs. Essentially, used this way, a home equity loan can improve your living space without costing you money, or even resulting in a net profit.
Buying a Car
When HELOC or home equity loan rates were lower than auto loans, you may be tempted to leverage your home’s equity to buy a car. This may not be a sound idea for a few reasons.
Auto loans are secured by the vehicle itself, meaning that failure to make payments results in the loss of a vehicle. If you use your home equity loan to fund a vehicle and can’t make a payment, you risk losing your home.
Plus, cars are depreciating assets. As a rule of thumb, they’re worth half as much as you bought them for the instant you drive off the lot. They are great at transporting people and goods long distances, especially in far-flung regions with no public transportation or active infrastructure.
From a financial perspective, cars are an absolute drain. Imagine not having to pay so much for fuel, insurance, parking, and, of course, the vehicle itself. In contrast, building wealth with home equity made possible with a loan is a much sounder and more reliable method of investing.
Investing in Stocks
Using a home equity loan to invest in the stock market is a major gamble. You never know how the market can change suddenly. It feels like everything will rise continually, until it doesn’t.
In Canada, the markets are already on the decline and some economists are predicting a recession at some point in 2023. There are definitely wise investments a person can make outside of the stock market and buying things like mutual funds or bonds may come with medium or low risk.
Burke Financial isn’t an investment or wealth management firm, so making recommendations for you is beyond our purview. We will say that buying stocks with money borrowed by leveraging your home makes a risky play even riskier and comes with very high costs.
More Real Estate
While real estate can be one of the most reliable investments a person can make, this isn’t quite as true if you need to extend yourself to buy additional investment properties to make profit. People tried borrowing from their home equity in the early 2000s to buy more properties, and when real estate crashed, so did they. You don’t want your finances to tumble down like dominos, and that’s what happens when the properties you own are worth less than your outstanding loans.
The money you get from a home equity loan or HELOC can be vital because it gets approved quickly. If you need it for an emergency, it’s there. But these funds aren’t to be used lightly. Make sure your fundamentals are sound before borrowing against the equity you’ve built up carefully over years in your home.
Buying an investment property comes with more risks than just the usual ups and potential downs. There could be repair or maintenance issues that consume more time and money than you thought. Maybe you can’t find the right tenant, and you purchase a second property that sits vacant for a period.
The right home equity loans in Ontario can give you an essential boost to help you afford your own home, and provide money to pay for life’s essentials. There’s no law preventing you from using them to buy other property, but it could backfire on you if you’re not very careful and experienced.
Vacations
There’s nothing quite like seeing the world. Whether you’re an adventurer looking for an exciting time in a new, dynamic country or you simply want to relax in the sun, everybody loves vacation time.
But trips tend to be costly. Are you really going to fly all that way and then curb your spending when choosing between restaurants and hotels? If you need to borrow from your home’s equity to travel, you may be living beyond your means.
By all means, enjoy yourself and take a break from work and life! You don’t necessarily need to leave the country to do it.
As a Canadian mortgage broker, Burke Financial is proud to help homeowners stabilize their finances and keep a roof over their heads. The above is just a guideline, and you’re free to do as you please. But be mindful about the financial risks out there, especially when using borrowed money leveraged from your home’s equity.
