The first part of this post was part of the Carnival of Personal Finance #104 hosted by Getting Green. There are 78 good posts about personal finance. Getting Green took the time to classified them into categories so you don’t waste your time. Make sure to check this out!
What if, What if, What if. We keep on hearing those famous â€œWhat Ifâ€ from all our relatives. People are afraid of potential risks surrounding investments and leveraging strategies and I canâ€™t blame them. There are risks, that is a fact. However, there is also a risk that you die taking your car to work every single day and we are still alive and doing it. In order to invest properly, you need to keep this in mind; risk is only a matter of perception. Here are some answers to â€œwhat ifâ€ people.
What if I lose my job and I canâ€™t keep up with the mortgage payments?
First things first, would it really make a difference if you lose your job without doing a Smith Manoeuvre? I guess you would tend to say no as you will be left with a mortgage to pay anyway and no pay cheque. However, there is a slight difference if you are doing the Smith Manoeuvre.
In fact, with a regular mortgage, you are stuck with a fixed payment every month until the end of your term. There is not much room for negotiation. In order to operate this financial technique, you will need a HELOC. The minimum required on a line of credit is the monthly interest. Therefore, you can skip principal payment and just pay interest the time being. I strongly suggest not considering this option as you will end up paying your mortgage till the end of time. However, it is a way to decrease your payment significantly until your financial situation gets better.
Another positive point about this leveraging strategy is that you are building a safety net in case of rough financial times. With a regular mortgage, your monthly payment includes capital. This capital is building equity in your property. You CANâ€™T get access to this equity until you refinance your mortgage. Do you think you have strong chances to get approved if you are asking the bank for money when you just lose your job? If the bank does so, it is because you are a good client and definitely because you will be paying a higher interest rate.
On the other site, the investments portfolio built through the Smith Manoeuvre is accessible at any time. You can then use this money to pay off your bill temporarily. Once again, I strongly suggest not taking your investment to pay off your bills and building a safety net aside especially for that purpose. This may trigger capital gains and modify your tax situation as your investments are related to a tax deductible debt. However, you are better off using this money than losing your house.
Unfortunately, these options are only available if you are doing a Smith Manoeuvre. With a regular mortgage, you are stuck with fixed payments and you canâ€™t get direct access to the equity built in your property. Banks are usually very impatient when it comes down to taking their payments. Having a safety net will avoid those uncomfortable situations.
Whoa! I thought I would have enough than one post to answer all â€œWhat Ifâ€ questions. It seems that Iâ€™ll write another one to answer other questions on the Smith Manoeuvre.
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