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Your house is not an ATM

February 14, 2020

The idea of buying a house is to have a place to live, it should not be an entire retirement plan and your house is not an ATM, so stop using it to withdraw money.  More Canadians than ever in our history are registered as homeowners, in fact close to 80% of Canadian households own their own home (according to Statistics Canada). 

The housing market has been going crazy in Canada if you bought a house for $200,000 four years ago, with 5% down, it may very well be worth $400,000 today.  Oh boy, all that money, just sitting there while you are running up your credit cards and lines of credit just to pay household bills.  You could consolidate the $60,000 worth of unsecured credit into either a renewed first mortgage or add a second onto the property.

The cost of consolidation isn’t so simple though – for several reasons.  First of all, the interest, although at a low rate, will be stretched and compounded over a protracted period of time and insidiously eroding your monthly income.  Secondly, if you couldn’t afford to live with a lower mortgage payment, you will surely struggle with a higher one.   Finally, you will undoubtedly run up the credit cards again necessitating a further consolidation around the time the current mortgage comes up for renewal.

At some point, like all machines, this ATM is going to break down.  One day you may try to withdraw funds and they won’t be available.  Oh, sure the house may have a bunch of equity, but you won’t qualify for financing because your income is too low.  Imagine our scenario, the house you bought for $200,000 then later refinanced, adding $70,000 to pay off unsecured debts, legal fees and mortgage broker commissions, when it was worth $400,000 is now worth $450,000 and all you want is another $60,000 to pay off your new credit card debt.  The problem being your debt service ratio won’t allow you to borrow more money.

Selling the house is always an option.  If you sold at the $450,000 you were looking for, you’d likely end up with about $75,000 in your shorts after paying about $45,000 in commissions, legal fees, penalties and interest, miscellaneous encumbrances plus moving costs.  Then you have to pay out the $60,000 current credit card bill(s) and $270,000 for the, previously renewed, mortgage.  If you are thinking of using your equity to buy another house “forget about it” – the same entry level house you bought for $200,000 is now starting at $450,000 and you won’t qualify for a $400,000 mortgage (don’t forget you need to pay legal fees and CMHC insurance fees again).

So much for the retirement plan.