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I want to throw something out there that many won't agree with, but I'd like to hear your thoughts. I am very open minded about this.

We have access to a substantial line of credit because we have significant equity in our home. Additionally, rather than build up a big savings cushion for one-time costs we throw extra money against the mortgage every month. The numbers aren't exact, but for the sake of arguement it is $1000 a month and every inflated payment takes an additional month off the mortgage of about the same.

If I had a one-time emergency of $10,000 and I were to put it on the LOC and carry it for a year it would cost less than $400 in interest charges.

If I put $1000 a month into an emergency fund for 10 months, it would extend my mortgage by 10 more months, costing me $10,000 (give or take).

You'll notice I'm not advocating not saving at all (we do have retirement, education, other savings), but pointing out that we all need to think about our own personal situations, particularly when receiving advice from others. Likewise some will also point out that if my $10K were invested in a HISA, or other very safe, accessible product, then it would actually be growing, not sitting gathering dust. Also true. There are some other assumptions, like I could pay off the $10K in a year (likely) and would choose to do so (also likely) and would not be directing that money elsewhere, including against the mortgage had the emergency not occurred (who knows?).

The reason we do it? We're comfortable with it. The same reaon we're not levereging the LOC to invest. Not that comfortable at this stage in life, but very confortable with the idea intellectually.

I post because just as we need to consider our own situation in receiving advice. We could also look at our own assumptions before dispensing it because what works for you, might actually be worse for me.

Your thoughts?
 

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LoC is a lower level of safety than real cash. Banks "could" take it away and call in your loan when you need it most. It comes down to what level of safety you can afford.

Not everyone can afford to have $10k just sitting somewhere.
 

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I have heard the savings argument several times and it never spoke to me.

I have always relied on home equity as my cushion. Now that the house is paid off, the l/c still sits there with about 50% of my house's value available. A few years ago, I was sitting around a picket line with coworkers and they were saying how long they could go without a paycheck. Most were talking weeks...I said nothing because the figure in my head was about 7 years. -as long as I calculated the home equity would support me until the house was fully mortgaged again (75%)

Banks are public companies with a responsibility to their share holders to seek good business. They aren't going to refuse to lend me money on this house.

Every situation is different. I don't know what type of lines of credit banks just close up on people... maybe If you live in a remote area, or a mining town with a resource that is no longer valuable. The kind of thing where much of the home's value could vapourize.

But if someone has, say, a brick bungalow on a bus route in suburban GTA, seems to me any bank would jump at a line of credit if it is a first mortgage.
 

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The only reason i sit on so much cash is that we have 5 rental properties , if i only had one house and cottage I probably would not feel the need for so much cash on hand.But we have always as long as i can remember have about 1 months expenses in physical cash on hand.
 

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I know a mortgage and a line of credit are two different beasts, but I agree with the OP's strategy. Essentially, you are opting to pay off debt quickly, which means the worst that can happen is if you have a $10,000 emergency and you draw on your line of credit, you simply return to where you would have been prior to paying extra on your debt.

If your mortgage was paid in full and you were fully debt free, I might say it's a better idea to have cash on hand rather than rely on access to credit in emergencies, but what you are doing is rapidly paying down debt, and if an emergency happens to come up, you'll have greater borrowing capacity anyway.
 

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The only danger in relying on a LOC for an emergency is when that emergency effects your ability to earn income, in this scenario you lose the ability to make payments on that borrowed money..... at the very least increasing interest payments you'll pay on that debt, at worst making you lose your asset (house)
 

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Yes, racking up debt at the same time as you've lost a major source of your income is a very bad idea. After the crisis passes, it will take you several years not only to pay back that debt but also to build back any reserves you may want to have.

But more generally, I have a problem with this because it means YOU are not in control of your finances. When you have money saved in the form of liquid assets (cash, TFSAs, cashable GICs, physical currency in the mattress etc), YOU are in the driver's seat.

I also have a problem with paying interest to borrow money that is essentially mine (as in the OP's case of borrowing against home equity).

A friend of mine went through a divorce several years ago. The moment the bank found out, they yanked out his LOC from under him so he couldn't borrow.

So while I understand what the OP is saying, I simply cannot accept the justification offered for not saving money during good times, to prepare for the bad times.
 

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^ Of course, people who maintain cash hoards will have lower retirement savings, all else being equal.

What I mean is your choice for a given level of income and consumption is small cash reserve and greater long term investments, or big cash reserve and less long term investments. To the extent there is a spread between cash returns and long term investment returns, that spread times the cash hoard is your annual 'cash pile insurance fee' in foregone invesment return. If you have a low probably of losing income, etc. it's probably more sensible to err on the side of more long term investments. If you have highly uncertain income, such as a contractor or other self-employed, it might be quite sensible to keep significant amounts of cash or short-term bonds.
 

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A friend of mine took a $50,000 HELOC to max her RSPS then she got married a year later to a man who had no money of his own and who had a house that needed serious work before they could sell it.She went to her Heloc and put $80,000 into his house then to find out his son was also on title .Now the son won't sign to get house sold and she is paying interest and all the payments on $130,000 HELOC .People spend heloc like it is their cash and forget you are going in the hole when you use it.
 

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I am planning to do as the OP is describing. I have a year's worth of living expenses in cash, and from now on any monthly surplus will be put towards the mortgage. The goal is to be debt free in 3-4 years so we can buy a bigger place (and start the process all over again). In reality we may sell sooner though.
 

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You are doing what you are comfortable with, which is always important.

That said... I would personally do the opposite. I don't put a dime into my mortgage until RRSP, TFSA, and RESP for the kids are all maxed. I'm in variable mortgages (2 properties) paying 2.1% interest. My payments are set as if I was in a 4.5% fixed mortgage, so I am already accelerating the payments to substantially, but anything extra goes to tax sheltered investments before they go to paying down debt that's running at 2.1%

In terms of credit vs. emergency savings, I do have a HELOC available for that purpose, as well as a higher interest unsecured LOC. Assuming you have the discipline not to dip into the LOC so that it is available for a real emergency, I think that makes sense.

I am unlikely to pay down debt at 2.1% - I am comfortable that I can beat that return handily investing, so it wouldn't make sense. If interest rates get much higher, that would change - and I can always take any unregistered investments and pay off the debt in the future if it makes sense to do so.
 

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Be your own master as suggested and protect yourself with cash in an emergency fund. Gambling on a LOC is fine if you want to but just remember it is still a gamble of some sort. No one can be trusted, bankers included so you must rely on yourself for almost everything when it comes to money.

So always start with a trust no one stand and that way you will check everything and everyone out so you don't get screwed in life. This is the angle I use so in my case I would have emergency cash on hand and would maybe use my LOC first and then my emergency money to hold out as long as possible if disaster hits me.
 

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A friend of mine took a $50,000 HELOC to max her RSPS then she got married a year later to a man who had no money of his own and who had a house that needed serious work before they could sell it.She went to her Heloc and put $80,000 into his house then to find out his son was also on title .Now the son won't sign to get house sold and she is paying interest and all the payments on $130,000 HELOC .People spend heloc like it is their cash and forget you are going in the hole when you use it.
HELOCs can be dangerous in the hands of people who don't make good decisions. The problem here was bad decision-making, not the line of credit. It would have been a really dumb decision if it had been cash, too.
 

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I would rather pay off the mortgage 10 months earlier. And use the HELOC as the emergency fund, no emergency, no interest. If you are putting and extra 1K ion your mortgage every month, you obviously have some financial responsibility.

I would use the HELOC for investing when the mortgage is paid off, but that is just my comfort level. And I personally wouldn't use all of the HELOC that the bank is offering, maybe only 1/3 of the property value. I err on the side of caution when it comes to debt.
 

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HELOCs can be dangerous in the hands of people who don't make good decisions. The problem here was bad decision-making, not the line of credit. It would have been a really dumb decision if it had been cash, too.
Agreed ... though there is one difference. It it had been cash, they'd have been out the cash. With the HELOC, there's the interest on top of the cash.


Cheers
 

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People spend heloc like it is their cash and forget you are going in the hole when you use it.
Some people. And that is why the OP's strategy is risky with many people yet defensible in certain situations.

I've never created an emergency cash pile. Here are some factors I consider:

- have you had a long history of continuous employment with income that at least keeps pace with inflation?
- do you have a 2 income household and is there a low correlation between your jobs' stability?
- are your non-discretionary household expenses less than either of your incomes?
- do you have significant assets that are relatively liquid (e.g. held in TFSAs, non-registered accounts)?
- are you unlikely to add children to your family in the near term?

If you take the approach that a LOC is better than an emergency fund, you still may want to have funds set aside for: annual vacations; house repairs; replacing a vehicle, etc. These types of expenses may occur regardless of whether you lose or significantly reduce your job income. Personally, I separate an emergency fund (up to six months of non-discretionary expenses in case of job loss) vs. planning for anticipated expenses that can be somewhat predictable, even scheduled.

Having an emergency fund isn't a bad idea. If nothing happens, it wasn't the fiscally optimal solution but there is no way to know that until after.
 

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I'm not anti-emergency fund. I just doubt rules of thumb that say everyone should have 6 months. Some people might need more, others less.

Most people having working cash. My working cash usually amounts to three or four months of my non-discretionary spending, so I have an emergency fund despite not really trying. I have no debt and I have a high savings rate that I use to contribute to RRSP and TFSA. In the event that I need money, I can raise some from TFSA (it is not verboten to sell longer term assets--it's just there's a chance that when you need the cash it may be inopportune to sell), or borrow cheaply. I don't have dependents. I'm a case study in someone who doesn't need much of an emergency fund. I can definitely envision a time when that might not be the case.
 
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