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Saturday, March 9th, 2024

The Risks of Using Home Equity to Buy Stocks – From Your Friendly Home Mortgage Broker

The Risks of Using Home Equity to Buy Stocks – From Your Friendly Home Mortgage Broker

Adil Virani Vancouver Mortage BrokerThere are many ways to use the equity you’ve built up in your home.

One approach used by some homeowners to use their available equity is to mortgage their home and use the funds to invest the money in stocks. But, you can take it from this Vancouver mortgage broker that there are some risks you should be aware of before you do.

The simplest method to obtain these funds is by applying for a home equity line of credit and to leverage the loan by investing in the stock market or other forms of investment vehicles such as a mutual fund.

The Investment Strategy

The ideal strategy that should be taken is to use the amount you borrow to not only cover the amount you are investing but also to cover additional expenses such as the interest on the loan and the fees which have to be paid to borrow the money.

This investment method should be avoided by those who are generally anxious about being in debt.

You should always take a look at the worst case scenario and ask yourself how you would manage if all your investment was wiped out. Could you cope and how would it affect your standard of living? If the answer results in some obvious turmoil then you should re-think your plan.

The stock market as you are well aware as especially seen from recent events and major market corrections can be very volatile.

Questions to Ask before you Invest

There are several questions you have to ask yourself before you take this kind of plunge such as:

  • Will you feel secure about taking on a debt that could see some considerable fluctuation in value?
  • What investment fees are you going to have to pay out to not only just buy the investment, but also to maintain it and what fees will you pay when you sell?
  • What king of taxes are you going to be paying because a capital gains tax can be as high as 50%?
  • Could you continue to pay for the amount you borrowed if interest rates were to take a significant jump upward?

The bottom line is that you this is a two sided coin, and if anything in your plan goes south, will you be able to afford to pay for it? Your loan may be called be called a ‘line of credit’, but it’s still a mortgage. If you default on the payment then you are going to be a serious financial bind and risk losing your home.

You might think that you could simply sell your stocks, but consider the down side in the following example. If, for example, you’ve invested the money and expect only a relatively nominal rate of return such as 5% from a mutual fund, and the market bottom drops out then there is a risk you may be forced to sell the stock at a loss.

The other option could be that you could be forced to sell your home. Neither of these options is particularly attractive is it?

Another Investment Alternative

But, there is an alternative where you can still take the plunge, and that’s simply not to use up all your equity and invest too big. You could always start more conservatively such as only borrowing between $5,000 – $20,000. This way there is a greater likelihood you will be able to repay the loan.

If you can’t afford the gamble when you examine the downside, then the you can take it from this Vancouver mortgage broker that your best bet is to either play safe or not at all.

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