The smart money is saying no to borrowing against home equity

Borrowing against your home equity to invest was the savviest move in personal finance until recently. Stocks were flying, and so was the housing market. Plus, you could borrow at rates that seemed trivial in comparison to projected rates of return.

The mindset that home equity must be exploited to generate economic gain persists, even as rising rates jack up the cost of carrying a home equity line of credit. A reader recently enquired about the $700,000 he has in his home. “Should I be using that equity to invest or for another purpose, such as purchasing another property?” he asks.

Answer: No, not now.

The Bank of Canada increased its overnight rate by one percentage point on Wednesday, a move that will be passed along in full to floating-rate debt like credit lines. The total increase in the overnight rate this year by the central bank amounts to 2.25 points, and more rate hikes are coming.

The cost of borrowing with a HELOC after the latest Bank of Canada move will typically be 5.2 per cent, plus or minus a bit. To make investing with a HELOC effective, you need to earn an after-tax return that beats your cost of borrowing.

Stocks are having a bad year, so you’re buying at better prices than six months ago. But there’s so much economic uncertainty to contend with today. A drop of 10 or 20 per cent in stocks is just as possible as similar gains. You’re dealing with similarly negative sentiments in real estate. High rates have already pulled back home prices from the February peak and more downside seems likely as rates soar.

It’s okay to leave your home equity untouched. That’s how we used to roll in Canada, before HELOCs became a wealth-building tool for many. Full credit to all who dipped into a HELOC and generated big returns in stocks or real estate. You exploited a moment in time.

We now live in a different time, where asset prices are falling and interest rates are rising. If we get to a point of low prices for stocks and property along with declining rates, borrowing to invest with a HELOC might make sense again.

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Rob’s personal finance reading list

How car loans can get in the way of home buying

All about how your debts and habits as a borrower affect you when applying for a mortgage. Watch out for car loans.

Dentistry is no place to economize

This article on the extensive health risks associated with gum disease highlights the value of regularly visiting a dentist office for cleanings and checkups. Here’s the latest on the federal plan to fund dental care for low- and middle-income children.

The golden age of thrifting is over

The New York Times on how the popularity of fast fashion has negatively affected thrift stores, where traditionally you could find quality clothing at cheap prices.

The FOMO killers

Fear of missing out is a huge driver of insecurity that leads us to ramp up spending. Here are 12 tips to help you stop comparing yourself to others.

Today’s financial tool

Tips for newcomers to Canada on improving your credit score.

The money-free zone

Given the boom in travel, I thought you’d enjoy a flight attendant’s list of the worst kinds of passengers on flights.

Watch this

Financial planner Zainab Williams offers some cost-cutting tips for people trying to keep up with the rising cost of living.

Tweet of the week

Some perspective on plunging consumer confidence.

ICYMI

• Canadians to get balance alerts from banks under new consumer protection rules
• The benefits of multigenerational living in a post-COVID-19 world
• Young investors are losing their enthusiasm for crypto as prices collapse

More Rob Carrick and money coverage

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Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.