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Effective use of home equity

Every part of my DNA tells me to pay off our mortgage as soon as possible and that is certainly a key to financial independence. However, there may be reasons why you should set up a Home Equity Back-Up Plan (HEBUP), even if your home is clear title.

Every part of my DNA tells me to pay off our mortgage as soon as possible and that is certainly a key to financial independence. However, there may be reasons why you should set up a Home

Equity Back-Up Plan (HEBUP), even if your home is clear title.

Okay, so I made up the HEBUP acronym! It's simply my cute name for a Home Equity Line of Credit (HELOC). We'll continue to call it a HELOC though, as I think there are far too many acronyms floating around out there and I'd best not add another one! HELOCs are available from a number of different financial institutions, although some are more suitable than others.

If your mortgage is paid up or if there is a small amount owing, it might make sense to register a HELOC against your home even if you never plan on borrowing a dime. We are helping more and more of our clients to set these up for a number of good reasons: Emergency Funds. Your financial plan may show a nice steady projection of your asset growth over time. The reality though is that life is often a series of unexpected events, be they unexpected medical expenses, needing to help the children, or major home repairs. A HELOC is a ready source of credit available to you at attractive interest rates. Without this arrangement you may be forced to liquidate other investments inefficiently and with possible negative tax consequences.

Investment Opportunity. You may have an opportunity to buy a business, recreational or investment real estate, or some other investment opportunity. If you need to borrow money a HELOC set up ahead of time

is a ready source of pre-approved financing, usually at the most attractive borrowing cost.

Supplement Retirement Income. The greatest danger to most retirements is a bittersweet one: you could end up outliving your money! Your home may be a last resource for retirement income and a HELOC offers you a way to incrementally tap some extra funds without needing to resort to expensive and inflexible reverse mortgages.

Protection against title fraud. There have been a number of circumstances where fraudsters have stolen the identities of clear title property owners who have no lien registered against their property. The crooks register a mortgage against the property and disappear with the borrowed proceeds. The real property owners often don't find out until the lender starts coming after them for missed mortgage payments! By registering a HELOC on the property it shows up at land titles office as a first mortgage and makes it difficult for anyone to register subsequent mortgages.

Don't do this alone! Work closely with your financial advisor to determine suitability and help guide you to the most effective strategy.

Richard Vetter is a certified financial planner and owner of WealthSmart Financial.