Opinion: Why be house-rich and cash-poor?

Who couldn’t use an extra few thousand dollars a year in spending money? The cost of borrowing is close to record lows, yet many of us fail to make the most of this.

Here are four suggestions for getting the most out of low interest rates:

1. When negotiating (or renegotiating) a loan, especially a mortgage, shop around and make sure you get the lowest possible interest rate you deserve.

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2. Take a stand against paying any administrative or legal costs associated with the loan. When pressured, the lender might agree to waive these charges, which inflate the true rate of interest.

3. If you have a mortgage, consider extending the number of years over which you repay the loan. Recently, I was surprised to learn that I was able to cut my monthly mortgage payments by about 50 per cent by lengthening the repayment period.

4. If you own a home that is mortgage-free, consider taking out a mortgage on the property. This might sound sacrilegious, especially to adult offspring who view the home as their inheritance. But the way Ottawa home values continue to rise, your heirs might never notice.

These days, money is cheap – so why not get your hands on more of it?

I have never seriously tried to negotiate a lower interest rate than the one offered by my bank when taking out, or renewing, a mortgage. That’s my mistake. And I’ve vowed not to make it again.

According to recent articles in the Financial Post, banks may extend mortgages to their most valued customers at about 1.5 percentage points below their posted rates. On a $100,000 mortgage, that could mean a savings of close to $1,500 a year for the bank’s most valued customers – or those who drive the hardest bargain.

I have no idea where I rate on my bank’s scale of credit-worthiness. But I do have a very good idea of what my home is worth. And surely that should be the key factor in determining the bank’s risk in lending money on the home, shouldn’t it?

It’s always been the case that only the relatively affluent can afford home ownership. Fully repaying the mortgage has been a goal of homeowners for generations.

It’s a worthy goal. But why be house-rich and cash-poor?

There are three choices for those seeking a loan based on the equity in their home. They are: a  conventional mortgage; a home-equity line of credit; or what is known as a “reverse mortgage,” where the borrower pays neither principal nor interest for the term of the loan.

I have a conventional mortgage that is within my means to repay, but I wanted to lower my monthly payments in order to have more spending money.

While I am locked into my mortgage for five years at a fixed interest rate, the bank’s terms permit annual early repayment of 15 per cent of the sum originally borrowed.

A bank employee told me I could lower my monthly payments by borrowing on a line of credit and using the funds to pay down the mortgage. How right he was! I was surprised at how much I am saving – especially since the interest rate on the line of credit is similar to the interest rate on the mortgage.

It took me a while to get my head around the explanation for this. Here it is:

My conventional 25-year mortgage has only a few years left to run, so much of my monthly payment is principal. My home equity line of credit is actually a 30-year mortgage, with a fixed interest rate for one year, so I pay off very little principal in the early years.

Initially, my bank wanted to charge me $695 for raising the limit on my line of credit, but it agreed to waive this charge when I protested that I was borrowing no more money than before.

Why did I choose a line of credit over a reverse mortgage? Because I had no need to increase my indebtedness; I merely wanted to lower my monthly payment.

Would I recommend a home-equity line of credit to those whose home is fully paid for and who want extra spending money? Yes, definitely.

Of course, the money must be repaid with interest. And, as with a conventional mortgage, you must make monthly principal-and-interest payments. But say you borrow $5,000 each year for the next 10 years. That’s $50,000, plus interest. With any luck, your home will rise in value by at least that amount.

In the last 10 years, average home prices in Ottawa have risen by about $12,000 a year – from $245,000 in 2005 to $368,000 last year. Surely the kids won’t begrudge your spending a fraction of their inheritance.

Michael Prentice is OBJ’s columnist on retail and consumer issues. He can be contacted at news@obj.ca.

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