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Advice for Parents with LOC

M

Millions

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Oct 6, 2007
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Hey everyone,

I'm just looking for some advice for my parents. They have a paid-off home in Calgary. However, they very stupidly racked up a LOC over the last 10 years to the tune of $150,000. Their interest rate is 2.45% (prime) and they've only been paying the interest, which has amounted to roughly $60,000 over that time frame.

Obviously, they lack financial skills, so in my opinion, I'm thinking they should get a mortgage instead with a fixed interest rate incase rates climb 1-2% soon. Also, perhaps it forces them to pay it off.

However, I'm not Warren Buffet, so I'm wondering what you think is the best for them? I know they could just double their payments, but they are not the type to stick to that without being forced. Also, if rates did go up by 2%, and they now have a 4.45% rate, they are going to be hurting.

Thoughts?
 
That discussion needs to be had in context with other assets they may own in RRSPs and TFSA as well as income(s) or a retirement plan.

In principle, it makes sense to borrow against your home in moderation to enhance your lifestyle or to invest.

Cash-flow matters. Income matters. Other assets they have matters. Their retirement plans matter.

If they save 2% on $150,000 ie $3000/year is thus a sideshow ie possibly immaterial in that context!

They could consider getting a combined mortgage plus LOC product of say up to 75%. If their house is worth $600,000 that would be $450,000 and $150,000 of it could be a cheaper fixed rate or floating mortgage. I just did this with TD on a rental house I own. Mortgage portion was prime minus 0.9. LOC portion is prime plus 0.5%. Consider that.


Sent from my iPhone using myREINspace
 
I think that's their issue. There never was a "plan" so I'm just trying to help them salvage what's left. They have no RRSP or TFSA anymore.

They just have a pension to live off of. Their issue is they didn't spend/invest that LOC wisely and all they're doing now is paying $600/mo in interest for no reason other than to stop it from increasing.

I would say their house is worth $550K. Maybe $600k in this market, but let's say $550. They currently owe $150K on a LOC.

My thoughts were to just keep it as is (prime even) but I know they'll never pay it off. Just the interest.

Or lock in a rate as a mortgage before it goes up, and then be forced to pay it down through a mortgage.
 
Why pay it off ? The house will pay it off once sold. How old are your parents? Do they spend too much ie could they reduce lifestyle expenses?


Sent from my iPhone using myREINspace
 
Just to save the $600 monthly interest. More as rates go up. They are mid 70's. I mean, they should be doing that and paying it off slowly but knowing them, it won't happen unless they sell the house.
 
I think spending your home equity as you age makes a lot of sense. We can discuss pacing of it, of course.

Several options exist

Option 1: Instead of an LOC they can consider a reverse mortgage although that is even more expensive.


Thomas Beyer, Asset Manager & Improver, Hard Asset Investor & DeFi Asset Hodler, Author, Father, Mentor, Hiker, Kayaker www.prestprop.com
 
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Option 2: create a mortgage & LOC combo ie home equity line up to 75% ie 450,000 and have a LOC behind it so that LOC room increases as mortgage gets paid down. So 150,000 mortgage plus 300,000 room to spend or invest.

Pull out $1000/month so with interest reserve that’s 20 years of $1000/month to spend extra.

Option 3: same as option 1 but maximize it and then invest the $300,000 say in a REIT or ETF. Some pay 8%, some even 10-12%. That makes the interest on the extra $300,000 tax deductible. Say it’s 4%. Invest $300,000 at 8% ie $24,000/yr or $2000/month minus the additional interest ie $12,000/yr or $1000/month.

In any case your parents can easily spend an extra $1000/month, or more if they invest it wisely !!

For this strategy to work I suggest INO.un REIT which pays 8%, LBS which pays over 10% or DFN which pays over 12% with fairly stable prices. Check it out !!

Feel free to buy me lunch if it works out !! On the house !!


Thomas Beyer, Asset Manager & Improver, Hard Asset Investor & DeFi Asset Hodler, Author, Father, Mentor, Hiker, Kayaker www.prestprop.com
 
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Option 4: Higher risk but higher reward

You take the $300,000 and open a margin investment account, say RBD Direct, BMOInvestorLine, TD Edge or Questrade

You deposit this $300,000 and buy 3 x $200,000 of the afore mentioned stocks / ETFs / REITs ie own securities worth $600,000 (you could go higher but that’s even more risk).

You borrow 50% ie you buy on margin.

You now collect say on average $5000/month in income (10% x $600,000 / 12)

Of that your parents use $2500 to live on and the other $2500 is used to pay interest on the $450,000 mortgage / LOC on the house plus the $300,000 interest on the margin loan.

Biggest risk: a stock market melt down.

But significant income generation automagically !!

Note: this is an opinion. Not investment advice. Real estate and stocks can not only increase in value but also decrease.

But: it provides fairly stable income with modest risk off your parent’s $600,000 house with $450,000 untapped equity !

Step 1: get the mortgage / LOC set up.

Step 2: get an investment account set up

Step 3: move $s over from LOC to investment account

Step 4: invest in income producing assets

Step 5: pay the monthly interest and keep the rest.

Retire in style - on the house without leaving it or selling it.

Debt is a tool, like a hammer, knife, saw, rope or pen. Learn to use is appropriately without injuring yourself !!


Thomas Beyer, Asset Manager & Improver, Hard Asset Investor & DeFi Asset Hodler, Author, Father, Mentor, Hiker, Kayaker www.prestprop.com
 
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haha Just saw this actually. Still trying to wrap my head around it. I have a feeling they'd be nervous to invest. Ironically, the worst thing they did with their LOC was buy about 40% of Suncor back in the day before it dropped 50%. I know ETFs are different. I do the e-index funds at TD, but maybe if we talk to someone at one of the firms?
 
They could save significant interest and pay off the principal by asking the HELOC lender to convert the HELOC into a Variable rate term mortgage. If you consider that the HELOC and variable rate will increase the same rate by moving it into a variable rate now at say Prime-.9% with 25 or 30 year AM they will always maintain the interest savings gap of .9% compared to the prime rate and the monthly payment will not be much different than what they pay now. Below is a calculation I do with my clients to show this comparison of savings.

What if Calculator*
Compound Period12times a year*Caution: Results are only estimates. Interest rates may vary, values may be off due to rounding and the calculator does not take into account fees, closing costs, property tax, mortgage insurance, tax deductions, etc.
Mortgage InformationOption #1Option #2
Loan Amount$150,000$150,000
Annual Interest Rate2.700%1.800%
Amortization (in Years)999930
PAYMENTMonthly Payment Difference5 Year Term Difference
Monthly Payment (PI)$337.50$539.55$202.05$12,122.86
Extra Monthly Payment
$0.00​
$0.00​
Total MONTHLY PAYMENT$337.50$539.55
What Term In Years?55
Outstanding Balance$150,000$130,267NOTE the lower principal as well
Interest Paid$20,250$12,640
$7,610​
Interest savings that you receive by taking the lower rate
$10,349​
Savings that you receive in pre-tax dollars (what you have to earn assuming 36% tax bracket)
$19,025​
Savings that you receive over 20 years if you take the lower rate for just one term (eg. 5 years)
because of compounding interest (assuming a 5% average rate).
 
KeithnCalgary said:
They could save significant interest and pay off the principal by asking the HELOC lender to convert the HELOC into a Variable rate term mortgage. If you consider that the HELOC and variable rate will increase the same rate by moving it into a variable rate now at say Prime-.9% with 25 or 30 year AM they will always maintain the interest savings gap of .9% compared to the prime rate and the monthly payment will not be much different than what they pay now. Below is a calculation I do with my clients to show this comparison of savings.

What if Calculator*
Compound Period12times a year*Caution: Results are only estimates. Interest rates may vary, values may be off due to rounding and the calculator does not take into account fees, closing costs, property tax, mortgage insurance, tax deductions, etc.
Mortgage InformationOption #1Option #2
Loan Amount$150,000$150,000
Annual Interest Rate2.700%1.800%
Amortization (in Years)999930
PAYMENTMonthly Payment Difference5 Year Term Difference
Monthly Payment (PI)$337.50$539.55$202.05$12,122.86
Extra Monthly Payment
$0.00​
$0.00​
Total MONTHLY PAYMENT$337.50$539.55
What Term In Years?55
Outstanding Balance$150,000$130,267NOTE the lower principal as well
Interest Paid$20,250$12,640
​
$7,610​
Interest savings that you receive by taking the lower rate
$10,349​
Savings that you receive in pre-tax dollars (what you have to earn assuming 36% tax bracket)
$19,025​
Savings that you receive over 20 years if you take the lower rate for just one term (eg. 5 years)
because of compounding interest (assuming a 5% average rate).
Click to expand...

Yes, this is great. Not sure why I didn't think of that. At the very least, it seems they'd be better with a variable mortgage as the rate is lower, as risky as a mortgage really, and the sales penalty if they sell is only 3 months interest, which in this case, would maybe be $1K.

I'm almost wondering if I should do this. I'm currently locked in at 2.45% on a 2-year coming due this July. Was hoping to sell but condo market sucks. Locked is inconvenient as the penalties for selling can be high, so perhaps even a 5-year locked variable is better, as I can sell with 3-month penalty or convert to a fixed rate if I wanted to anyway
 
Millions said:
Even if this is over their heads, still happy to treat you to lunch though. You're in Canmore?
Click to expand...

I live on the Sunshine Coast (aka Costa del Sol aka BC’s Riviera) north of Vancouver now but I am in Alberta frequently as many assets are there to be managed, inspected or assessed !


Thomas Beyer, Asset Manager & Improver, Hard Asset Investor & DeFi Asset Hodler, Author, Father, Mentor, Hiker, Kayaker www.prestprop.com
 
Hi, Thomas, your suggestions are great. However, since they only collect government pensions, they may not be qualified to get a home equity line of credit at 75%, the reverse mortgage strategy is good, at least they don't need to worry about the monthly interest payments. They can get 55% of the house value at 600K, pay off $150K, still have $180K to invest, if investing in your suggested three funds, they can get $1500 per month without needing to pay the monthly interest expenses. Will this strategy be more practical?
 
angelapeng said:
Hi, Thomas, your suggestions are great. However, since they only collect government pensions, they may not be qualified to get a home equity line of credit at 75%, the reverse mortgage strategy is good, at least they don't need to worry about the monthly interest payments. They can get 55% of the house value at 600K, pay off $150K, still have $180K to invest, if investing in your suggested three funds, they can get $1500 per month without needing to pay the monthly interest expenses. Will this strategy be more practical?
Click to expand...

Yes it’s certainly an option worth exploring.

Reverse mortgage rates in the 4.5% range these days though ie about 1-1.25% higher than regular mortgage rates.

Benefit of LOC is you pay interest only on what you took out, and rates usually 0.5-1% above prime.

Cheapest money is a regular mortgage. Check that out too.

Try to get a regular mortgage plus LOC behind it so that LOC room goes up as mortgage gets paid down.

So three options, all with their pros and cons.


Thomas Beyer, Asset Manager & Improver, Hard Asset Investor & DeFi Asset Hodler, Author, Father, Mentor, Hiker, Kayaker www.prestprop.com
 
Indeed, debt, if used property, can really boost investment income and return, plus tax savings as well.
 
angelapeng said:
Indeed, debt, if used property, can really boost investment income and return, plus tax savings as well.
Click to expand...

If .. being the keyword. Leverage has its own pros and cons but like a pen, tank, canon or knife can indeed be very impactful.


Thomas Beyer, Asset Manager & Improver, Hard Asset Investor & DeFi Asset Hodler, Author, Father, Mentor, Hiker, Kayaker www.prestprop.com
 
I'll talk to them about the LOC + mortgage.

I take it the variable is the way to go? As of today, it's prime - 0.85 whereas their LOC is prime even. So, right away, savings.

Can you really invest $180K and get a relatively safe return of $1,500/month?

I buy e-index funds through TFSA and those have been over 10% for years, but I assume like anything, they could also fall.
 
Thomas Beyer said:
I live on the Sunshine Coast (aka Costa del Sol aka BC’s Riviera) north of Vancouver now but I am in Alberta frequently as many assets are there to be managed, inspected or assessed !


Thomas Beyer, Asset Manager & Improver, Hard Asset Investor & DeFi Asset Hodler, Author, Father, Mentor, Hiker, Kayaker www.prestprop.com
Click to expand...
Ahh lucky you :) Well, if you let me know in advance, happy to do lunch
 
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