How much are you worth? Net worth is the real work

BY CLEVE DeSOUZA

Dream bigger than a debt-free life. Imagine yourself building wealth.

This week, I’ll show you how average Canadians, just like you are building their family’s wealth.

To build wealth, though, requires a shift in focus.

When most people consider a household budget, they think about how much money they get to spend. They focus on reducing expenses. That’s a great first step. That attitude will get your expenses under control. But it’s going to take an extra push to build wealth.

To understand how to make that extra push, we first need to define a few terms.

Net worth is the difference between your assets and your liabilities. An asset is anything that puts money in your pocket. A liability is anything that takes money out of your pocket.

Sometimes, though, it can be difficult to distinguish between liabilities and assets.

Most financial institutions and academia’s label personal homes as assets. But not every home is an asset. If you pay a monthly mortgage, your home is a liability to you and an asset to the lender. Every month, you write a check to the bank, taking money out of your pocket.

It doesn’t have to be that way. Your home can become an asset. For example, if you are a landlord and a tenant pays you a monthly fee that’s more than your mortgage, then that home becomes an asset.

A more common way, though, to turn a home into an asset is to understand home equity, home equity loans, and home equity lines of credit.

Home equity is the difference between what your home is worth and how much you owe on it. For example, the average home in Toronto is worth $1,040,856, according to the Toronto Housing Market Report for June 2020. If you borrowed $800,000 to buy that $1,040,856 home, then your home equity is $240,856. As you pay down the principal you will build more equity, but the house will not generate any income so it is merely an “academic” asset at best.

If you don’t do anything, your equity sits like stagnant water and your home is not leveraged as a real asset. But if you tap into a home equity loan, you begin leveraging your home to generate a new income stream. Home equity loans offer millions of Canadians the opportunity to build wealth and generate passive income.

In Canada, 75% of our homes are owned, according to Canadian Mortgage Trends, an award-winning publication for the mortgage industry. About 6 million of us are still paying mortgages. Nearly another 4 million Canadians don’t owe anything on their homes.

The wealthiest Canadians know how to leverage the equity in their homes and build wealth. The poorest Canadians don’t understand this and don’t make the most of their home’s equity.  

But home equity isn’t liquid. You can’t reach into the cupboard and pull out $250,000. So how do you access the asset? Home equity loans and lines of credit turn your home’s value into tangible money. These often are available at lower interest rates than other forms of credit. In addition, the interest you pay on a home equity loan can be tax deductible.

Invest the money into something that generates a higher interest rate and you begin building wealth. In 2020, though, only 1.45 million of us are taking advantage of home equity loans. Home equity loans can finance almost anything including buying a second property.

Of course, the risk is if you don’t pay back the loan, you could lose your home. Experts suggest you consider only very secure investments for your loan. But if you seek wise counsel and carefully consider your investments, then a home equity loan makes perfect sense. Leaving the equity in your home after the mortgage is paid off is the disease that keeps many of us in financial despair.