This article is part of a series aimed at the residential mortgage holder’s understanding the value of the equity in their home. The series explores a number of different ways the would-be mortgagor can approach the value of the investment in their home over time.
The equity in your home is that part of the principal loan that you have repaid at a given point in time. It represents your ownership portion of the property you are acquiring through the mortgage process. This series also emphasizes the fact that mortgage debt can be good debt, once properly managed.
This week’s case is about Rawle and Mary:
Mary became an orphan when she was only 13 years old. She inherited her parents’ estate in full. Besides cash in the bank, the proceeds of two insurance policies, and a vehicle, she also inherited the family home, along with all the household effects.
The vehicle had been promptly sold. The proceeds from that sale and partly from the insurance policies contributed to settling the outstanding mortgage on the family home. So, in this case, Mary has established 100 per cent ownership or equity in the family home. Most of the remaining cash from that inheritance had been used to support Mary through a four-year North American university degree.
Mary was now married to Rawle, and they were proudly living in the family home. Since their marriage, she and Rawle had been able to afford to renovate the house and upgrade the furnishings to their taste. In fact, this young couple felt well-placed in having such a beautiful home with no mortgage to pay. Most of their contemporaries were perpetually complaining about the burden of their mortgage installments.
Rawle was one of the most surprised men when he was advised to restructure his debt. He had visited an internet financial counselling site. The words of advice he got was that it would be more economical for him to take out a mortgage on the family home than to carry the personal loans for his and Mary’s car and the store credit for the furniture and appliances used in refurbishing the home.
The basis of this advice was that the interest rate on a residential mortgage would be lower than the interest rate on the personal loan for the vehicles or on the hire purchase loan for the furniture and the appliances. Furthermore, mortgage interest was income tax-deductible. Mary and Rawle stood to power ahead financially on both counts.
Rawle decided to check this advice with the bank manager where he and Mary held accounts. He was quite apprehensive as he and Mary had never even approached the manager; there had been no need in the past. Anyway, he made the appointment and was pleasantly surprised by the warm welcome and cordial conversation he had with their banker.
Yes, that banker did confirm the web advice that Rawle had discovered. The banker provided calculations and suggestions based specifically on Rawle’s and Mary’s circumstances. The couple would be reducing their full ownership of the property and with that came additional risks. Yet, given that both Rawle and Mary felt quite secure about their employment income, the risks were tolerable.
Rawle wasted no time in convincing Mary about the merits of negotiating a mortgage. They agreed to limit the mortgage period to 5 years. This tack also resulted in a reduced overall monthly installment. Since then, any debt that Rawle and Mary need to manage their lifestyle, they first consider how it may be accessed through the equity in their home. Â
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.
