Building Your Financial House: Build Wealth through Your Mortgage
At Altrua, we love working with mortgages and are committed to providing the best possible mortgage experience, at the best mortgage rate. So it might sound surprising, but at Altrua we believe that the most important thing is not simply owning a home.
Instead, it’s the quality of time and lifestyle we spend in our homes that really counts. It’s about enjoying peace of mind at home today, while being excited about tomorrow. This is why Altrua developed a Mortgage Based Financial Planning Programme, called Building Your Financial House.
Whereas most financial advisors begin the financial conversation on the topics of investment goals and life insurance, we base our financial conversation on the mortgage.
Because for many Canadians, and most of our clients, the mortgage and the home is currently the single biggest part of their financial picture. It’s the mortgage that is the 300 pound gorilla in the room. So it makes sense to start here, by looking at strategies to save the most on, and manage our mortgage most effectively. Then from here we look at complementary financial strategies, from life insurance to ways of strategically using mortgage wealth building that will help you take your financial and life freedom to new heights.
Even if you have already visited your bank, Ontario mortgage broker, or another advisor for advice, the information and advanced opportunities you’ll read about over the next few minutes can improve your financial house substantially. We look forward to working with you to achieve your best mortgage plan, and over time, your most prosperous financial future.
There are 3 main components of our financial house:
- The Foundation – or the Mortgage Plan
- The Framework – or the Investment Plan
- The Roof – or the Protection Plan
We will go through each of these and provide you with the details you need to understand how to achieve financial peace of mind and optimal wealth building. We’ll cut through the clutter that can be found in endless financial publications and 300+ page books to bring you the truth in what’s most effective.
But if you only take one thing from this article – it’s this: Have some sort of budget.
There’s no need to go into much detail here. You know what a budget is. But if you’re not currently budgeting on a weekly or monthly basis, consider the following 3 points:
- Budgets add to your freedom.
Instead of limiting what you can do with your money, a budget simply shows you where your money is going. In doing so, it gives you a big picture view of how your money can be proactively allocated to the places that make you most happy. You’ve probably worked close to 200 hours or more for that paycheque. Spend just a few minutes to know where it goes.
- Budget for exciting things.
What are some of your most exciting goals? Is it to travel the world? Start your own business? Retire by the age of 45? Whatever it might be – add these to your budget. It will give your budget purpose and excitement. It’s good to balance the day to day peace of mind that a budget can provide, with excitement for the future.
- Design your own budget, based on your own personality.
For some, the budget can be a very intricate, highly detailed spreadsheet that is monitored on a daily basis. Whereas for others, a budget can be as simple as allocating the bi-weekly or monthly pay cheque to 3 separate bank accounts: One for set monthly expenses (such as the mortgage and property tax), one for variable monthly expenses (such as grocery shopping and leisure activities), and one for saving and getting ahead. There are many budgeting strategies, but the point is to find the one that works for you.
Any homest attempt at becoming wealthy and financially independent involves a budget of some sort. The most effective ones are usually written down, but again, can be as simple as setting up automatic payments into paying down a mortgage faster and investing. Your budget is the main tool that will help you build your entire financial house.
The Financial House Foundation: The Mortgage Plan
The foundation of any physical house needs to be laid properly, as it’s the strength of the foundation that the rest of the house is relying on. It’s no different, when building your financial house. The foundation of a financial house is our mortgage. But more specifically, it is how we manage our mortgage, through proper planning and strategy, that will help us maximize our long-term wealth building and financial security.
There are 3 related mortgage planning strategies to consider:
- Lowering Your Rate.
- Mortgage Freedom Faster Planning.
- Home Equity Optimization.
Lowering Your Mortgage Rate
Lowering your mortgage rate is an opportunity that is presented to you not just once, but over the life of your mortgage. If you can save 0.25% on your mortgage, per mortgage renewal, over 3-5 terms (not years!), this can easily represent $10,000s of thousands of dollars in interest savings.
This is one of the easiest wealth building strategies, because you are simply spending thousands less, for the exact same mortgage. The opportunity that this savings can bring over longer periods of time is enormous, especially when combined with Mortgage Freedom Faster planning.
Mortgage Freedom Faster Planning
Mortgage Freedom Faster planning is one of the safest and most effective ways of saving money. Compare your mortgage rate to any bank account or GIC return of a similar number of years. The Mortgage rate is almost ALWAYS higher than these secure investments. So it usually makes sense, instead of holding money in safe investments, to pay down the mortgage faster using your mortgage pre-payment privileges. For example, not paying 3% interest on $1000 of mortgage is a much better deal, than getting paid 1.5% on $1000 in a bank account or GIC.
The main idea behind mortgage freedom faster planning is looking for creative ways that work for you to allocate extra payments towards the mortgage principle, using your mortgage prepayment privileges.
25 year mortgages can reasonably be paid off in 15 years or less. Imagine what you will do once you own your house outright, and have 100% of your income to do what you want with?
Mortgage Based Wealth Building
For those who have home equity available, the mortgage is a great tool to consider for helping to build wealth faster. There are two reasons why mortgage based investing can work well:1
1.‘Leveraged Investing’: The main idea is to use low-interest rate mortgage money to buy higher returning investments. For example, if your interest rate is 3%, and your return on investment is 10% – then you earn a profit of 7% on the banks money.
2. Faster compounding: Compound growth is the most powerful force in investing and wealth building. By starting with a larger investment amount as soon as possible, the magic of compounding will work for you much more effectively. For example, a one time investment of $100,000 over 10 years could reasonably produce more than triple the return as the same $100,000 investment spread equally over 10 years, at $10,000 per year.
To see if leveraged investing is right for you based on your risk tolerance, and how this strategy can work well with the Mortgage Freedom Faster strategy, talk to an Altrua advisor.
In the next section we’ll look at the framework of our financial house, and what to consider investing in for superior returns.
The Frame: Maximize Your Investment Return
Creating short and long-term investment goals help us to live with more peace of mind today, and excitement for tomorrow. But this section of Building Your Financial House is not about convincing you to invest, rather it’s about how to invest at the lowest risk levels, for your maximum rate of return.
There are two investment types that have proven to be more effective over time than traditional investing in mutual funds.
Low-cost index investing:
This is the strategy that Warren Buffett, probably the world’s best investment manager recommends above all others. For our purposes here, the main thing to understand about Low Cost Index Investing is that you can realistically achieve higher returns than mutual funds, because the investment management fees are much, much lower. Because you keep more money in your investment, and less money in the mutual fund managers pocket, the result is higher investment returns for you.
For example, instead of paying 2.25% per year of your entire portfolio, or even more in investment fees, low cost investing can be done for 1% less cost, or closer to 1.25%.
|2.25% INVESTMENT FEES||1.25% INVESTMENT FEES|
|# OF YEARS INVESTED||20||20|
|ANNUAL RATE OF RETURN||8%||8%|
|DOLLAR COST OF FEES||$170,423||$103,671|
|INVESTMENT VALUE AFTER 20 YEARS||$295,672||$362,424|
So we can see from the example that a 1% lower in fees earns this $100,000 portfolio $66,752 more over 20 years.
Just like saving 1% on your mortgage rate would be an incredible difference, it’s just as important to save on investment fees over time.
If you have invested already, how much are you paying in fees?
Creating Rental Property Wealth:
For those who find the idea of owning a rental property interesting, it can be an amazing way to build wealth. Rental property investment creates an excellent diversification from a base investment portfolio, and often produces rates of return that far exceed those available in stock market based investments. Over the past 20 years, rates of return in the 30% – 50% per year of invested money have not been uncommon for rental property investors.
Here are some other leading benefits of Rental Property Investing:
(1) Leveraged investment. As we have seen before, using the bank’s money to invest magnifies the gains or losses of your investment.
(2) Rentals Can Pay For Themselves. With a rental property investment, it’s usually the case that the tenant will be paying off the mortgage and a majority of the other property expenses. So even if the value of the property remains the same for 25 years, you may still end up with a property that was fully paid for by the tenant.
(3) Stable long term track record. Real estate investing has enjoyed one of the most proven and stable returns in history. This is because everyone needs a place to live, and the population is always increasing.
(4) Rents go up with inflation. With a rental property investment, as inflation creeps up, rents are able to be increased as well. In this way, your investment in real estate is resistant to inflation.
(5) Tax favourable. There are two big ways that real estate investing is tax favourable. The first is that the interest on the mortgage used to buy the property is tax deductible as an expense. This has a big effect on lowering the cost of interst paid for the investment. The second is that when a property is sold, the tax treatment is favourable as only 50% of the gains earned on the property are taxed.
Between low-cost index investing and rental property investing, there are great opportunities to earn superior returns and build wealth faster over many years to come. Everyone will have different investment comfort levels and risk tolerances. Your Altrua Advisor is highly knowledgeable on these investment types and how to help you execute a complete, custom-tailored financial plan.
The Roof: The protection of your financial house.
You can have the greatest foundation and framework built for your financial house, but it can all mean very little if you don’t have a roof over your head on a rainy day.
Most of us are optimists, and do not like thinking about the negative ‘what if’ issues in life. But small and large disasters do happen to unexpecting individuals and families in Canada every day, and no one is resistant to these unfortunate possibilities.
One of the best things you can do to protect yourself and your family is look into owning your own life insurance policy. The mortgage is a perfect opportunity to review your life insurance needs, because your assets and liabilities have been recently calculated.
The cost of life insurance can be as low as $15 – $20 per month, and it can help just to consider this small cost as part of your mortgage payment. Afterall, fire insurance is mandatory, but the chances of a fire are far less than premature death. The ‘I can afford a $2000 per month home payment, but not $20 per month to ensure the protection of my family’ mindset deserves close attention.
BEWARE: Many people think that they own work based life policies. The big thing to understand is the policy is actually a group based policy, that is owned by the employer. So if anything ever affected employment, you may find yourself without insurance at a time when you are no longer able to qualify. Also, most work based policies only cover 3 – 6 months, which is a good start, but is usually not nearly enough to maintain a desired standard of living and achievement of important goals, such as education costs or retirement.
While the protection aspect of Building Your Financial House is not as exciting as wealth planning, it is probably the most important. The peace of mind that comes with knowing that you and your family are protected, in case life takes a turn, is priceless.
Through this program we have looked at advanced mortgage based strategies, and ways to build our financial houses in the most effective ways possible. The purpose here is not to be a complete guide, but to introduce you to some of the main ideas that can make this possible. It is also meant to introduce you to the idea of creating a Financial Plan, that can neatly organize and manage all of your financial areas effectively.
Thanks for reading!
Your Altrua Advisor has all the information to expand on any of these areas, answer your questions, and ultimately work with you to create the peace of mind and excitement for the future that comes with having built a great financial house.