# Mortgage or LOC



## sagsal (Apr 7, 2009)

I have a very large mortgage (more than $500k and less and a Million) currently at prime minus .95 (so 2.05) and a relatively small LOC (around $50k) at prime plus .5

Should I pay off the LOC first and make 30 year payments on the mortgage and then accelerate mortgage payments?

If I concentrated on the LOC will take about 18 months to pay most of it off then I can concentrate on the mortgage

Any thoughts?

Thanks


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## HaroldCrump (Jun 10, 2009)

Is it a HELOC or an unsecured?
I'd personally pay off the LOC first.
The rate is higher, the amount is relatively smaller, therefore, will give you an motivational boost once it is paid off.

Also, not having an outstanding LOC balance makes your financial situation more stable, gives you more option, and makes it easier to get credit in the future if you need it.


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## sagsal (Apr 7, 2009)

Thanks, that is what I was thinking

It is a HELOC by the way

I actually want to start using it to make investments once it is paid off and I can concentrate on the mortgage - a bit of a smith maneuver


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## HaroldCrump (Jun 10, 2009)

Ha, you lost me with the last part.
How much do you plan to leverage from the HELOC after paying it off?
$50K will not provide you enough investable capital to make the SM worthwhile or have any appreciable impact on your $500K+ mortgage.
Anything more than that will increase your risk profile substantially.
A large mortgage + a large HELOC against that same property is a very risky situation, and if there is even the slightest hint of a RE valuation correction, the bank can ask you to pay down the HELOC.


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## sagsal (Apr 7, 2009)

Sorry not sure I understand your point

It is a readvanceable mortgage so my thinking is once the LOC is paid off and I am concentrating on the mortgage I was going to take about 25k a year and invest in around 4 stocks (2 are already set up as DRIPs) and once the mortgage is paid off I will pay off the LOC - I am only 40 and my wife and I have 2 DB plans with the government so this is a long term plan


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## the-royal-mail (Dec 11, 2009)

Why the shell game? Why not save up the money you want to invest and then play with that?


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## HaroldCrump (Jun 10, 2009)

The readvanceable mortgage does not change the risk profile.
In the end, the risk factors are the same - home valuation, stock market risk, interest rate risk, etc.

The DB plan does change the profile, though (you didn't mention this in your original post).
I assume there is a high degree of job security as well.
If you make these two key assumptions i.e. job security and safety of the DBP, then essentially don't need need to save for retirement on your own.
That makes your plan more viable.


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## sagsal (Apr 7, 2009)

Sorry - important point and should have mentioned - and yes high degree of job security for both of us

So what you are saying is that it is fine to use LOC to make investments - or I shouldn't at all

I would feel comfortable heading into retirement with more than our DBs


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## sagsal (Apr 7, 2009)

Because it will be a long time before I am debt free and have that ability

With rates remaining low and stock valuations as I see the next ten years (age 40-50) as an opportune time to put away in solid dividend stocks and DRIP and then when the mortgage is gone just have an LOC to deal with but at the same time have a nice portfolio to build on


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## the-royal-mail (Dec 11, 2009)

I can't support the concept of borrowing to invest, esp someone who is in as much debt as you are. 

Do you have anything set aside for emergencies?

Just because you can do something, doesn't mean that you should.


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## sagsal (Apr 7, 2009)

Fair enough and you are probably correct - I do have money put aside that I can pull from in an emergency as well as access to other LOC

We also have high salaries so if I concentrate on paying down (we just finished a renovation) than in a couple of years we will have room 

Thanks for the advice!


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## HaroldCrump (Jun 10, 2009)

sagsal said:


> So what you are saying is that it is fine to use LOC to make investments - or I shouldn't at all


As long as the overall debt load is manageable and reasonable and you don't overexpose yourself to market risk, it should be ok.
The latter is easier said than done.
It is very very easy to get caught on the wrong foot just when a major downturn hits.
Stocks fall, dividends get cut, interest rates on the HELOC rise, etc. - could all happen more or less simultaneously.
In general, a substantial rise in rates tends to reduce the stock prices of high dividend paying stocks such as REITs, unit trusts, etc. so watch out for that in case you are planning to have a large allocation to dividend stocks.



> I would feel comfortable heading into retirement with more than our DBs


How much more?
The question you have to ask yourself is whether, given the 2 solid DBPs and the job security, it is worthwhile to take this additional risk.

Additional risk is justified if and only if additional return is required - why else would anyone take on any kind of risk.
If you need a thrill, you can always go to Vegas or sign up for skydiving lessons.

So essentially your two choices are:
- Increase risk profile via SM or leveraged investing
- Direct the approx. $2,000 a month in your free cash flow tha you have currently to non leveraged investing.

Is the risk adjusted return of option 1 really worth your while vs. just doing option 2?


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## Spudd (Oct 11, 2011)

I agree, I don't get why borrowing the money to invest is more attractive to you than using non-borrowed money. Once the LOC is paid off, you can either aggressively pay down the mortgage and then invest with your leftover money once it's gone, or you can continue with your 25-year amortization schedule as it is, and invest with the leftover money you have every month (that was previously paying off the LOC).


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## Sampson (Apr 3, 2009)

Harold is providing a lot of excellent advice. Not sure I have too much to add, only that I believe, and academic research supports, investing in equities for long periods.

So if are planning to work another 20-25 years, it is important to get monies invested now, otherwise you may have to take on much more conservative asset allocations due to short investing time frame.

"Shell games" are important and if debt is managed well, an excellent way to growth wealth. Not necessary, given you can save $50k over 18 months, but if you have certainty and good risk control measures - not as negative as many like to suggest.

If everyone had to save before they invested, not one single small company would be started. Borrowing is a fact of life and is controllable.


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## sagsal (Apr 7, 2009)

So sorry I am lost you a bit (though thank you for weighing in)

If I have 20 years to invest, ability to pay down 50k a year on the mortgage - then if I am careful and patient than it is worth taking 25k a year or so out of the LOC and investing

I was thinking: Fortis, BCE BNS and probably a pipeline (personally I like IPL) and the DRIPing over the years

It still leaves me plenty of room in the LOC if I need some money


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## Four Pillars (Apr 5, 2009)

Spudd said:


> I agree, I don't get why borrowing the money to invest is more attractive to you than using non-borrowed money.


Because the potential returns are higher.

Of course if it doesn't work out, then the potential losses are higher.

I second others who question why you need to do this. That said, if you do it - I would try to diversify a bit more. 

I did a leveraged plan for a while - you can read the whole story here if you wish:

http://www.moneysmartsblog.com/smith-maneuver/

It was an interesting experience.


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## Sampson (Apr 3, 2009)

The sooner you can get money invested, the longer it has to 'work for you' (i.e. compounding), and also, the more likely investing in equities will be profitable.

If you wait to first pay off your LOC, and also pay down more of you mortgage, lets say that takes 5-10 years to get the HELOC gone AND bring down the mortgage to a 'reasonable' $300,000-$500,000 level. You investment horizon will be much reduced (i.e. not too many years left until you need to the money for retirement) and there is a much greater probability that investing in equities will NOT outperform other asset classes - therefore you are exposing yourself to the risk of equities without reward.

My comments about risk were simply that as Mike points out, if things go sour, it is magnified and your losses will be greater than without leverage. So, if you can handle and tolerate those losses due to good cash flow etc, then the potential harm of the strategy is reduced.

Hope this makes more sense.


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## sagsal (Apr 7, 2009)

It does - much appreciated

thanks!!


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