Sunday, April 15, 2018

Why I'm Dumping My HELOC!

This has proven to be a great way to generate some portfolio juice by borrowing against my house.

It's just an asset sitting there doing nothing. We are in the fortunate position of having paid off our house years ago. Now that it's paid for I wanted to get something out of the asset without taking on a reverse mortgage.

Going the HELOC seemed to be the way to go and it was. It was until interest rates started to slowly melt up.

When I first tapped into this account our rate was 2.5%. It's now 3.9%.

That is significant. Well, it is to me anyway. I have negotiated with my Scotiabank lady until blue in the face and that's it. It still rises when the bank raises rates in conjunction with what the BOC has done.

Based on the higher interest rates resulting in higher monthly interest payments and the threat of even higher rates coming, I have no choice but to ditch and pay off this account.

I only stuffed this open account with dividend paying blue chip growth stocks. No high yield junk. Even still, trying to keep the dividend yield up with the interest rate payments is too much of a challenge at a 3.9% rate.

I know a lot of people who pay lower rates but have millions in the bank and are preferred customers with platinum type bank plans. 

I don't and besides having a small paid for townhouse we are just considered a steady and loyal customer.

Debt and Investing

This is what a lot of investors call good debt. Good in the sense that you have your house back stopping your stock picks. Interest payments used to buy investments can be used to offset taxable income. That's a big win and good use of a fixed asset like your house.

Collect dividends and use that money to pay the interest payments. Enjoy the capital growth that hopefully comes with owning stocks and or ETFs. Reduce and offset gains or losses from other sources of income.

The Risks of a HELOC 

This is not for everyone and you have to establish some equity in your home before the bank will lend you up to 70% of the appraised value of your house.

With the meteoric rise in home prices here in Southern Ontario people have been seduced into this product and use it like their personal ATM.

They don't buy assets they buy non deductible consumer stuff. Stuff like cars, electronics and home renos. That's OK too but it just becomes unmanageable debt.

We have all heard the horrifying statistics of how Canadians on average owe $1.75 for every dollar of income. 55% of us are living paycheque to paycheque. This is unsustainable and this year alone 47% of all mortgages are up for renewal according to CIBC Capital Markets. Lots of pressure on homeowners and consumers on the horizon.

One of the biggest risks with a HELOC is a drop in the value of your portfolio. In the short term nobody knows how long or when the drop will end. 

When I look at the last couple months it has been so volatile and so hard to see drops of 700 points on the S&P 500 followed by a 200 point gain and then another 600 point plop. It's hard to take when using borrowed money and you see what you owe exceeding what the value of your investments are. I'm seeing that a lot lately looking at my account and it's disturbing.

"Why risk everything you have and need for something you don't need"
- Warren Buffett

Buffett has never used borrowed money to invest. Matter of fact he lends out large sums of money for rather favourable preferred share positions in companies. We are far below that but the lesson is important and meaningful.

My Drop Dead Date

I have been slowly selling off positions and paying off the line of credit. My interest payment dates are usually on the 11th of each month. I'm trying to time the stock dividend payments before I sell the stock. I have to ignore the capital gain and future prospects of the stock and just focus on building up a large payment and paying off as much as I can. I still owe 227K.

I hope to have this all wrapped up no later than 11 June and be free and clear with nothing owing on our HELOC.

My Final Take

This was a lot of fun and a very profitable way of building wealth with debt.

Another problem with this strategy in my case, is that my wife hates debt in all forms. After working hard and paying off our house while forgoing RRSP contributions, she hated the idea of borrowing more money.

I can't blame her and now with interest payments rising it's just too challenging to make a positive return. It's more important to have a happy wife than a HELOC. I'm not ditching the HELOC as in closing the account, just bringing it back to a zero balance.

Do you borrow to invest?

Recommended Reading: 

Del Vicario on Growth Stocks

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