How to use your home to diversify your portfolio

If you’re like many homeowners in Canada, your home has become your largest asset. This means you’re left with a portfolio weighted more heavily towards real estate than your initial investing strategy has likely planned for.

While there’s no doubt that Canadian real estate has been rewarding for investors in the past, having all your eggs in one basket of course has its downsides. In this article, we’re going to go over how you can use your home to diversify your portfolio, and that doesn’t necessarily mean moving away from real estate.

Your home as an asset

With every mortgage payment you make, you are weighing your portfolio more towards real estate equity than before. When you first buy your home, you’ll likely pay somewhere in the ballpark of a 20% down payment towards the equity, giving yourself a sizable equity investment into the property. Over time, as you pay off the balance of the mortgage, your equity ownership of the property grows, and it does so even faster if you make pre-payments. On top of that if you’ve owned the property for more than a few years, it’s likely that the value of the property has appreciated as well, further adding to the concentration of real estate to your portfolio.

Your home is an asset, and it’s one that you’ve likely poured a lot of time, effort, and capital into. 

If you’re properly planning your financial portfolio, it’s important to determine what allocation of your net worth you want in each asset. It’s inevitable that the weight of each asset will change over time, especially as high returning assets outperform and begin to weigh more heavily, however it’s also important to monitor this and occasionally rebalance your portfolio according to your plan.

Most Canadians have the majority of their net worth tied up in their home

With the success of the Canadian real estate market over the past decades, many have found themselves nearing retirement with a substantial portion of their net worth locked up in their home. As of 2019, Canadians had over 40% of their net worth in real estate, with the majority of that through their principal residence. It’s safe to say it would be uncommon for most financial advisors to recommend their clients to have 40% of their assets in an illiquid asset that isn’t generating income. Diversification is a key part of financial planning and even if you are optimistic about the future of Canadian real estate (like we are) there’s something to be said for diversifying that across more than a single residential home.

What if there were a way to take advantage of the value of your home while still living in it?

How to leverage your home to diversify your portfolio

Luckily, there is a great way to diversify your portfolio without having to sell your home, in the form of tapping into your home equity through refinancing. When you borrow equity against your home, you are accessing the cheapest available form of financing that can be accessed by most individual investors. We’ve talked extensively about the benefits of incorporating leverage into your financial plan, but if you’re a homeowner, chances are you’ve already had plenty of experience with leverage through your mortgage.

Recommended reading: A guide to leveraged investing.

If you’re in a situation where you started out with a 20% down payment which has grown to a much larger percentage of ownership in your property, you can consider tapping into some of that equity as a rebalancing of your portfolio to reflect your previously determined leverage ratio.

By borrowing equity from your home, and investing it into other assets, you can diversify your portfolio and make sure you aren’t overweighted in real estate equity.

Why you might consider diversifying from your home

The equity in your home is illiquid and also doesn’t generate income. By borrowing, you can invest in assets that better align to your lifestyle.

When you might not want to borrow against your home equity

Although a periodic rebalancing of your portfolio is advisable to all investors, taking on additional leverage might not align with everyone’s financial situation. First of all, leveraging your home at favourable rates is easier to do while you’re employed and may not be an option for you at all when you retire. After retirement you will no longer have qualifying income to allow you to access affordable financing, so It’s important to plan ahead and make sure that you make these decisions as early as possible. The solutions that end up being available could potentially be less desirable if you don’t plan ahead. Options for tapping into home equity after retirement include reverse mortgages, private mortgages, renting rooms/parts of your house or selling your home to fund your retirement if you run short on cash, all of which might not be preferable to refinancing early and planning your portfolio in advance.

Disclaimer

This article should not be taken as legal, tax or investment advice. Please consult your wealth advisor, tax professional and legal professionals before making any investment decisions.