In a personal finance column in the Globe and Mail, financial planner Ted Rechstaffen explains how homeowners may leverage the existing equity in their home through a second mortgage or home equity loan for investment purposes, utilizing tax savings on dividend yields and/or insurance policies “(t)urn ‘dead’ money into new wealth.”
“In today’s super-low interest rate environment,” Mr. Rechstaffen writes, “someone in a 31-per-cent tax bracket can easily lock in an after-tax borrowing cost under 2.5 per cent for a five-year fixed mortgage. The tax-deductibility comes from borrowing and using the loan to generate income.”
In terms of investing strategies that will use the withdrawn equity to generate income, Mr. Rechstaffen suggests either an investment in a conservative stock portfolio of blue-chip stocks with a consistent dividend stream, or an investment in a joint last-to-die insurance policy which will yield an after-tax payout at the end to fund a legacy for beneficiaries and charities.
Mr. Rechstaffen calculates that investing the funds withdrawn from home equity in a ‘widows-and-orphans’, dividend-focused portfolio of preferred shares and utilities stocks would generate an average dividend stream of approximately 4.5 percent, taxable at a 10 percent dividend tax rate (in Ontario), for an after-tax net return of 1.55 percent – a good return for funds that would otherwise sit unrealized as home equity generating no return (i.e., ‘dead’ money).
The beauty of Mr. Rechstoffen’s strategy – which is only recommended for relatively well-heeled individuals with a large equity to debt ratio – is that it will not affect the rate at which equity will continue to accumulate as the second mortgage or home equity loan is paid off, and the value of the home increases.
