Did you know that the biggest debt in your life could also be your biggest source of wealth?
Let me demonstrate:
Networth or Wealth = Assets – Liabilities
Assets comprise of your home, stocks, RRSPs, savings, and the like. Liabilities are all your debts combined. Your biggest asset is your home which is what we are going to focus on and your biggest debt is your mortgage.
Therefore, the equation above could be rewritten to say:
Wealth = Home – Mortgage
Once you have bought your home, can you directly influence its value without taking into account renovations? No. You could say your home’s appreciation is affected by housing market conditions or even the world economy – both external factors which are beyond your control. I suggest then that we do not spend too much time and energy on factors we cannot control.
What about your mortgage, could you influence it at all? Yes indeed, but the only way you can influence this is through hard work and management.
Here’s an excerpt from an Advisor.ca article by Stephanie Holmes on June 7:
“Mistakes that borrowers make sometimes is they act like magpies. Magpies are basically slightly more interesting crows. They are known scavengers with a high degree of intelligence but most famously they are strongly attracted to “shiny” objects and will even steal them. A while ago, I was having a discussion with a fellow advisor about how easily distracted we can all get by interest rates and that we often fail to see the total cost of borrowing. She replied: “The rate is the shiny thing.” I took it from there.
When it comes to borrowing far too many of us are like magpies. We are easily distracted by or attracted to the “shiny thing”.
For many, the rate is truly a shiny thing when it comes to financing our homes. What really matters is how much to we pay in interest over the full-term of the mortgage and the balance that’s left when we are exposed to new rates.
No one seems to be focused on this at all. I’ve had so many advisors tell me about how concerned they are about rising rates.
Don’t get me wrong, rate is an important factor and not to be ignored and it is the easiest thing to sell people on. However, rate isn’t the whole story. I’ve seen many a client get much further ahead by structuring their cash flow so they can pay down a variable rate, open loan much faster. The exposure to rates is reduced every time the put a dollar toward their mortgage. Sure, the rate isn’t locked in, but if done right, the risk of the rate can be nearly eliminated by proper cash flow management and rapid debt repayment.”
So who wants to be wealthy? Do you think a rate difference of .10% or .25% will make you wealthy? No!
The only way for you to achieve higher levels of wealth is to set a goal, plan and work hard to get there. Take control of your life. Manage your cash flow and work on rapid debt repayment. In terms of your mortgage, how could you burn this debt fast? Incidentally if you forget my name, the best way to remember is “Burn a debt”. I will give you tips on how to burn your debt fast.
First tip:
Payment privileges. Take advantage of them. Accelerated bi-weekly payments, increase your payments every year, make additional payment e.g. make an extra double payment every year. Did you know that if you do just one thing, one thing out of this…you would take off 3 years of mortgage payments. If your mortgage payment is $2000 per month that’s a savings of $72,000! Assets go up…liabilities go down.
Second tip: (how many of you have a variable mortgage?)
Variable mortgage payments – how many of you have a variable rate mortgage? I suggest you set the payment at the same levels as those required for a 5 year fixed mortgage. This allows you to pay more towards the principal every month. I have a strategy called “Inflation Hedge Strategy” which results in providing clients with $20-30K in equity. I will talk about this in a future blog.
Third tip:
Annual review process – interestingly enough most people review their asset or stock portfolio quarterly but they don’t review their mortgage annually. You should sit down with your mortgage broker once a year to look at potential ways to maximize savings. Perhaps your rate is higher than what’s available in the market, or maybe you have equity in your home upgrade. You may want to consolidate your debts or increase your RRSP or stock portfolio. Isn’t it true that your financial picture changes every year? Why won’t you review it in conjunction with your mortgage and find out if you are still on track with your financial plan?
Can you get rich quick with these suggestions? No. But will you get rich for sure? Yes.
If you read books on achieving wealth e.g. Richest man in Babylon, Millionaire Next Door, David Bach’s Finish Rich books, all of them teach us that the key to getting rich is to work hard, to save more than we spend and to get rid of our debt. I have given you some tips on how to do that. But the rest of the work is up to you.
Remember, you cannot directly influence the value of your home. But you can control your biggest debt to improve your net worth and become wealthier over time. I have given you tips on how to burn your debt. Take advantage of your prepayment privileges, if you have a variable rate mortgage change your payment as if you are paying a fixed rate mortgage, and finally review your mortgage annually.
There’s wealth and money in your mortgage. I suggest that when you go home tonight, to go find it!
Thanks for reading!
We welcome your questions and feedback.
Bernadette Laxamana’s Mortgage Blog
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