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KEY018 | Home Equity Line's of Credit - How to use them the right way. by Mind Map: KEY018 | Home Equity Line
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KEY018 | Home Equity Line's of Credit - How to use them the right way.

07 Feature Segment

To some, the word Line of Credit brings with it some interesting emotions.

Positive Emotions, Sense of control, Wealth accumulation from using it to invest

Negative Emotions, Don't know how to get rid of it., Ended up further in debt than before it was created., A black hole.

But, LOC can be a very powerful tool when used properly.

Just be careful you totally understand what you are doing., Easy access to cash for business owners funding their start up costs., Money can be easily accessed, Usually an interest only payment so servicing the debt is easier., When used for business purposes, the interest in Canada is tax-deductible., Easy access to cash for senior executives who need to buy shares of their company's common stock as part of their employment., Money can be easily accessed, It is easy to carry due to the lower servicing requirements., Interest is tax-deductible., The Smith Manouevre, This is an interesting way of engineering your debt and investment management in Canada., Theoretically it works and looks great on paper., As long as the investment returns outpace the break-even interest costs (which is lower than you think) the concept illustrates very well., Here's how it works., Set up a home equity line of credit., Make your normal mortgage payments., As you know, whenever you make a mortgage payment, a portion of that payment goes towards principal repayment., So, if for every $100 of principal repaid on the mortgage, this would in essence create $100 of equity to borrow back on the line of credit., Over time, your overall debt would stay level because as you pay back the mortgage you are turning around and taking the principal you just re-paid and borrowing it back to invest., Over time, this line of credit would build but so would your investment portfolio that you purchased using these funds., The interest on the line of credit - because the line is being used for investment purposes - would be tax deductible., So, over time you are morphing your non-deductible mortgage to a deductible debt and releasing the dead equity in your home to build wealth through your investment portfolio., Again, this sounds and looks great on paper - due to one assumption., The assumption being used in all of the illustrations is that your investment return remains positive and above the break-even rate required to outpace the interest expense., That's a big assumption considering that there are definite periods of time when this is not the case., And, the one thing you need to always remember when you borrow to invest is that the gains (and losses) are magnified., If you are interested in utilizing this strategy, ask (and answer) this question first:, Do you need to do this to accomplish your financial goals?, If you can't or don't know how to answer this question, you really should not move forward with this strategy., Always use your financial plan as the sounding board for any strategy you use., The plan will either support it or it won't., If you don't have a financial plan then get one - before you do anything else., Use it in place of an emergency fund., I really like this idea., I have never understood why anyone would hold on to cash that was earning 1.5% (at the most) at the same time they were holding debt that they were paying 4% on., Why not just pay off the 4% debt, which in essence is the equivalent of generating 4% in benefit., You would never make an investment that guaranteed you would pay more than you earned., So why do so many people?, They just don't look at it properly., Hopefully this podcast will help., Use it in place of a mortgage during the last 5 years of your mortgage., When you are down to your last 5 years, mortgages will limit the pace at which you pay them back., Most mortgages limit the amount of excess principal you can contribute on an annual basis., Lines of credit are fully open to be paid off whenever you want., So, if you know that your going to be coming into a windfall or if your close to the end of your mortgage and are very aggressive with your overpayments - aggressive in the sense that you are definitely going to pay more than the mortgages prescribed allowable amount - go with a line of credit to remove any restrictions., This way you can pay it off whenever you like.

However, a LOC can also be a very poor tool when used incorrectly.

Have you ever heard of an all-in-one plan?, You may of heard of Manulife's ONE program., You may of hear of National Banks All-In-One program., The underlying concept of these programs are awesome., I actually think that in the right hands, they are the most powerful tools you could ever use., But, in the wrong hands, they can decimate you., What happens in these plans is that you direct all of your incoming cash flow (your wage, earnings, etc...) to this account., The account will apply 100% of this cash flow towards the debt and you will only pay interest on the outstanding balance., This is great because you have 100% of your cash flow going towards your debt., However, you need to live off of some of this money so whenever you need money (to pay bills, buy groceries, etc...) you borrow it back when you need it., You are given a check book, a bank card, online management, etc..., In essence, this becomes your new bank account., When you do the long term math on this it works incredibly well., This is because you are never letting idle cash not work for you., If cash is sitting idle, you are simply not paying interest on this amount., But, it makes it really easy to buy whatever you want whenever you want because you can write cheques for ever - or at least until you don't have any more equity left in your home., See how it makes accessing the equity in your home really easy., So, in the wrong hands, this can get out of hand., But in the right hands, this is one of the most powerful debt repayment structures I have ever seen.

So, should you use a Line of Credit in your financial planning?

Here is what I would do.

First, develop a financial plan to help to analyze your current situation.

Then, once you know where you are today and what you're on track for financially - ask yourself if you like what you're on track for.

If you're not happy with that, then determine which assumption(s) you would be willing to adjust., Things like retirement income, Retirement age., Portfolio risk., Contribution levels.

Then, if you are debt free and still require a bit of a boost in your wealth accumulation plan - consider releasing some of the equity in your home to put it to good use., BUT DON'T DO THIS UNTIL YOU HAVE PAID OFF YOUR MORTGAGE.

Financial planning is the key. It always has been and always will be.

09 Bonus Segment

12 Key Questions You Must Ask A Financial Planner BEFORE You Hire One!

1. Ask if they charge fees for their services., Always remember that nobody works for free and if they don't charge fees for the financial planning they do, they have to get paid somehow., The only other way they get paid is throughout the selling of products.

2. Ask them how you can be sure that the advice they will provide is in your best interest, Make sure they tell you how they analyze things and what process they go through to find out what is the best course of action - FOR YOU - not them.

3. Ask if they sell products as well as provide financial advice., If they say yes, this should not be seen as a negative., At the end of the day, you will need to implement your plan somewhere. Just make sure that there is no incentive to the advisor over and above a normal implementation fee for recommending what they are recommending., I find it interesting that there are some planners out there who promote that they are not licensed to implement your plan., Nobody wants to have to go out, find someone who is licensed to provide the solution that the planner has identified as appropriate and have to explain to the licensed advisor why they want that solution. Chances are that the advisor might have another idea and then this just causes confusion., Once you have built up the trust and rapport with your financial planner, you will want them to implement the plan for you.

4. Ask if the implementation products can be obtained even if no plan is prepared., This is kind of a trick question because what you don't want to hear is "Oh sure, we can do that too"., The reason is that who in their right mind would ever go to a doctor and obtain a prescription BEFORE the doctor had a chance to do the proper analysis?, This is also knowns as Malpractice.

5. Never pay more than 50% of the financial planning fee in advance., It's kind of like a contractor - everyone needs a certain portion of their fee up front to cover initial costs but you would never pay your contractor 100% of the fee up front. You would always hold some back to ensure the job got done to your satisfaction.

6. Ask them how they keep up to date with the constantly changing financial environment., What you want to hear is that they are part of study groups, mastermind groups, conferences, required CE credits., This also shows that they are holding a recognized license as a licensed CFP is required to obtain a certain minimum of continuing education hours every year.

7. Ask how many times you can expect to get together with the planner., In the first year, you would have AT LEAST four meetings but usually more., After the plan is in place and is now being monitored, 1-2 times a year is usually more than enough., Unless something comes up that requires a meeting (life event, birth of a child, loss of a loved one, change in tax law, market crash, loss of a job) then you should meet as many times as necessary.

8. Ask what investment philosophy the financial planner believes in., What you want to hear is that they believe in developing an investment solution that is designed to support the required rate of return of your plan., If they talk about earning the highest rate of return for the lowest risk, I would get concerned., Risk is a funny thing. People's risk levels change as the market performance changes. People are less risk averse after markets have performed and more risk averse after the markets have crashed., In actual fact, the exact opposite is what will make a successful investor., So, focus on developing a portfolio that is designed to support your financial plan's requirements and not your appetite for risk.

9. Ask who your long term relationship will be with?, You always want to know your planner is there for you when you need them., Look at it like you do your dentist, You don't want your dentist to clean your teeth - you want a trained hygienist to do that., You do want your dentist to perform a root canal on you when you need it - not the hygienist., You want your planner to develop, create and craft your financial plan., You want his team to ensure it stays on track and when it does fall off course, you want your planner to work with you to bring it back on course.

10. Ask how many clients the planner has and how many they take on in a given year., You don't want to work with someone who has thousands of clients., You just won't get the service you deserve., Successful financial planners can work with 250 - 300 Households a year. Period.

11. Ask if they do it all or if they turn to specialists for assistance with your plan., You don't want a jack of all trades in this case., You want someone who is an expert at identifying needs and then who turns to other specialists to help fulfill the needs., You want to hear that there is a team approach.

12. Ask if they hold the CFP License., If they don't, then they are not serious about financial planning., Would you ever go to an accountant who wasn't a CA?, Would you ever go to an unlicensed mechanic?, Would you ever go to someone who practices medicine without their MD?

Order your Free Special Report titled 12 Key Questions You Must Ask A Financial Planner BEFORE You Hire One. Visit

01 Intro

This is The Key To Retirement Episode 18.

04 In This Edition

In this edition of The Key To Retirement, I'm going to talk about Home Equity Lines of Credit - and how to use them the right way.

And, in today's bonus segment, I'm going to reveal to you the 12 Key Questions You Must Ask A Financial Planner Before You Hire One! And provide you with a free copy of this highly regarded special report.

05 What's New?

Lot's of tax changes we're having to deal with and analyze their impact on our client financial plans.

I was contacted by The Toronto Star to be interviewed for a story their doing on Business Owners and Retirement.

It really is amazing how a comprehensive financial plan is the only way to reveal to business owners - who have been investing heavily into their business - how Net Worth is not the most important component of their financial plan - it's liquid net worth.

This is harder to come by but with some planning today, we are able to show them strategies that can allow them to become a lot more liquid, save a lot in taxes and build a business that is more attractive to a potential buyer so they can maximize the value they hope to receive when (and if) they decide to sell.

On a personal note, I have been finally able to get out on my mountain bike recently. The weather for this has been great - but I think Cathy shrunk my biking shorts over the winter...