Using your Mortgage for Extra Borrowing

You cannot borrow more than the price of a home. However, you can borrow more than you actually need. For example, if a home is valued at $350,000, you may qualify for a mortgage of $315,000. But perhaps because of the profits on the sale of your past or existing home, plus other savings, you could potentially put down $100,000 – meaning that you’d only need a mortgage of $250,000. Should you still go for the $315,000 mortgage, or should you keep it at $250,000. Or does the answer lie somewhere in between?

The answer really lies in your overall financial situation. Here’s a wise strategy to follow when you’re thinking of borrowing more than you technically need:

Step 1: Identify What you Have

Create two columns. On the left column, write down what you have, starting with cash (savings accounts, GICs, RRSPs, stocks, and other investments), and then followed by hard assets like your car, jewellery, and anything else that can be considered an asset (an asset is something that has a cash value so when you sell it, you get cash for it).

If you have another piece of real estate – your principal residence for example – don’t list the market price as an asset. Your asset is the portion of the house that is fully paid up with no liens. So, if the market price of your house if $350,000 and your mortgage outstanding is $300,000, your asset is $50,000 – not $350,000.

On the right column, list all your debts (credit cards, car loan, line of credit and monies you owe to family members). Also list debts that you will incur, such as membership dues and any bills that you have to pay in the future for things you’ve already bought, or services you’ve already received.

Once you’ve added both columns, compare the amounts. Do your debts outnumber your assets? If so, I don’t recommend that you borrow more than your mortgage until you’ve trimmed down your debt. Make sure you strike a healthy balance between debt and asset. In fact, it’s preferable if your assets outnumber your debts by a significant margin.

Step 2: Build Up Your Arsenal

If you’re thinking of buying property and borrowing more than you need to buy it, plan well ahead in advance. Work with a timeframe of 6-12 months to get your investment goals into gear. This is where a financial planner’s advice might prove useful. Work with an investment strategy that optimizes your existing investments through laddering and other techniques. Again, this is where expert financial advice can come in handy.

Plan an exit strategy so that when you’re ready, you can convert some of your non-real estate investments into property. This will reduce the amount of money you have to borrow.

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ABOUT THE AUTHOR:

Zack Ashan -- a.k.a. "The Mortgage Guru" -- is a licensed Mortgage Broker based in the Greater Toronto Area. Zack's personal mission is to help as many people as possible WIN the mortgage game, by providing them with clear, honest and valuable advice. Learn more about Zack and pick up his groundbreaking book "The Insider's Guide to WINNING the Mortgage Game" at http://www.mortgage-guru.ca.