Would you advise borrowing from home to invest... in this case (HELOC, rev.mtg.)

[K-ice]

So I will lay out a scenario with a few details changed for anonymity but the bones are true.

So a friend with a home in the Vancouver area worth about $4M was "advised" that they could borrow about $1M from their paid off home and earn $33,000 a year.

I say "advised" loosely as it did not come from an actual financial advisor. The details are not clear to me (or them).

I am thinking that there are a few ways to do this. First borrow from a HELOC and invest the rest.  But then any mortgage interest is going to eat into your market gains.

There may be some annuity package available, the friend is 75, but then again the interest from the HELOC will eat into the annuity considerably.

I think just getting a HELOC and take out what you need little by little or a reverse mortgage would be better than a lump sum that large. (They have not been an investment person in the past)

They are looking to make some renovation updates to continue enjoying their home, maybe pass a bit of an early inheritance on to their kids and generally want to enjoy life a bit more while they can. 

They have very little other savings, investments or CPP income. I need to ask what their income is.  My thought was don't borrow more than your current income could cover the interest payments on.

I think it is important for them to enjoy themselves but I just don't know the least risky way to do so.

[Andy R]

Borrowing to invest requires paying interest which reduces cash flow down to around zero, give or take. It is generally used when you can let inflation and compounding work in your favour over the long haul to grow the value of the assets because since you have no cash flow benefit, the only way to improve your wealth this way is through appreciation of value, and a 75 year old doesn't have a long haul, nor even enough time to ride out the volatility.
I have nothing against borrowing from your home to invest, but why do it at 75?

[MustacheAndaHalf]

In general, someone age 75 shouldn't listen to new people giving money advice.  The people who reach out to older people typically have their own greed in mind.  Hopefully this friend sought out advice himself, which would be a better scenario.

A rough search says a $4M home in Vancouver means $10,000/year in property tax.  And maybe your friend is the exception, but a $4M house usually means a more expensive lifestyle as well.  So maybe your friend doesn't want to give all their details of their assets and income?

The other possibility is cashing out and moving, which is easier at age 75 than age 85.  Sell the house and find a cheaper one, or a place to rent.  But that assumes someone suddenly finds themselves with a $4M house and no assets or income.  There's definitely something missing from this picture.

[K-ice]

Thanks.

I didn't really see any magic math that would make this a good idea for a 75y old. Too risky considering they have never really invested before.

So what about reverse mortgages or HELOCs?

I know the mustacian crowd wouldn't use them but have any of your older friends or relatives had success with this?
 

[talltexan]

Is selling the $4,000,000 house and downsizing to a $1,500,000 house possible?

[K-ice]

Is selling the $4,000,000 house and downsizing to a $1,500,000 house possible?

I would say not at this time. There are no health reasons forcing them to do so.
There are many emotional & quality of life reasons for them to stay.

[robartsd]

It certainly wouldn't be unreasonable to expect that investing $1M could produce a ROI that is above a mortgage interest rate by 3.3 percentage points, but cash flow could be difficult.

They are looking to make some renovation updates to continue enjoying their home, maybe pass a bit of an early inheritance on to their kids and generally want to enjoy life a bit more while they can.

That doesn't sound like much would actually be invested - they want to spend money. They can pull the $33,000 a year from a reverse mortgage for 25 years and the loan balance would only be about $1.6M. They can provide a bit of an early inheritance if they want, but it will ultimately make the total inheritance smaller.

If they had plenty of cash flow already, but were interested in maximizing their estate to contribute to some legacy, I could see borrowing equity to invest working well (though downsizing would still be much better at accomplishing this goal).

[Prairie Stash]

So what about reverse mortgages or HELOCs?

I know the mustacian crowd wouldn't use them but have any of your older friends or relatives had success with this?

I've used HELOCs in Canada. When interest rates were falling I used a HELOC to pay off my house and then get a new rate.

The rate on a HELOC is better then a reverse mortgage, you pay extra for the convenience of a reverse.
https://www.chip.ca/reverse-mortgage-rates/

With a HELOC, you use it to also make interest payments every month. It will spiral, once your friend hits 2 million debt they should sell their house, hopefully thats 20 years out  or longer(age 95+). It all depends on how much they borrow/spend per year.

With a HELOC and rising rates you should take out mortgages (1/year) and get a mortgage ladder in Canada. It will lock in debt to prevent runaway inflation. The purpose is that if rates rise too fast, theres a chance to sell before danger hits, its also a good tool to force evaluation.

Its no more risky than a reverse mortgage. Cash flow is easy, you have a steady flow.

Once you start though, theres no turning back until the house is sold.

[theolympians]

Is selling the $4,000,000 house and downsizing to a $1,500,000 house possible?

I would say not at this time. There are no health reasons forcing them to do so.
There are many emotional & quality of life reasons for them to stay.

If it isn't possible to downsize to free up funds due to "emotional reasons". There is no reason to borrow against it.

Whatever this schiester is pitching to them should be avoided. Downsizing and freeing up money is the preferred way, they have control over their money. Anything else and someone is lending them money, which means less control.

A HELOC is a glorified credit card. Enough said there.

A "reverse mortgage' is often pitched on television, that should tell you something about the quality of the product. The only people I am aware that that have gotten one are BROKE. They didn't save and are scrounging for money. I look at it essentially as a "balloon loan". With balloon loans the bank gives you a bunch of money upfront; then the principle, IN BULK, comes due a set amount of time later. That make sense for large scale real estate investors, not for Joe lunchbox.

I call it a balloon loan, as the bank doles out a portion of the balloon amount each month until the equity is exhausted. At the end of the set period you owe a bunch of money. I read one bank's statement regarding this that read to the effect," You don't have to give us your house, you can simply repay the loan!" WTF! If you took out this loan you will be in no position to repay it at the end of the term. It is a LOAN. Banks make money on loans, the borrowers do not. Investing against a loan sounds like a scheister's get rich quick scheme.

Have them downsize and free up a million. They wouldn't need to invest. Just live off that amount. If they do anything else than downsize it is foolish in my view.

[talltexan]

I rented an attic apartment by the Lake from a well-to-do couple in the area north of Chicago, and we remain in touch. They sold their house to JB Pritzker (it was a seven-figure sale) and downsized to a condo in their late 70's, and were thrilled. They are still in great health, and not having to maintain that property meant they had more energy for recreation and managing relationships across a big family with nearly two dozen grandchildren. The condo was located in a walkable suburb, and they still have easy access to DT chicago and many amenities.

[clumlee]

The only thing I would use that money to invest in would be muni bonds that pay a higher interest rate than what you're going to get hit with on the HELOC.

[K-ice]

Thanks I am still wondering what is best. I like the mortgage ladder idea.  Borrow only what they need and lock the debt away at a known rate.

"Anything else and someone is lending them money, which means less control."  This is true and worries me.

Thanks for the tips.  Still working on this.

[talltexan]

I don't know how banks treat an elderly couple with minimal cash flow who are looking to take out a mortgage for 6%-13% of a property's value. All of the numbers are so different from average.

[K-ice]

Quite the coincidence that I was looking for this information again at the 1 year mark from the last comment. No update from my end. But all the same questions remain.

The HELOC with the mortgage ladder still seams like the best option.

[ChpBstrd]

The risk is that you have a mortgage/HELOC payment that is due with 100% certainty but any investment that could possibly yield more than the mortgage rate comes with less than 100% certainty. E.g. if the mortgage is 4% it is possible for the total return of your bond funds to end up being less than 4% and you’ve lost borrowed money. Thus, this is a leveraged bet against Sequence Of Returns Risk. It is comparable to buying stocks on margin. Much of the time, you’ll make tons of money, but occasionally you’re wiped out.

I agree with the others that moving is your friend’s best choice. Sentimentality over property has the potential to ruin one’s life, but using financial leverage in an attempt to stay in an overpriced house when one cannot keep up with the bills is risky in the extreme. This story is How A 75 Year Old Millionaire Can Still Die Broke.

[vand]

Using your home to finance investments comes with obvious risks which - if you explicitly need them pointed out to you - means answer is a big fat "no".

[bthewalls]

Would you really do that near the end of the 10 year growth cycle?