(Discovering how to borrow on my equity–it’s easy!–opened the door to a great bargain which I would have missed out on.)
Robert Thomson: Let’s summarize, It’s 1989 and you own three properties. You have sold one. You live in another and you rent out the other two.
Aqlim: The next property I bought was with the realtor himself.
R.T. How did that come about?
Aqlim: The house (on 70th Ave.) cost us $118,000. The down payment was $30,000 or $15,000 each. I didn’t have this kind of money so I had to come up with something quickly. By asking around I discovered that I could borrow for one house by using the equity on another house as a guarantee or collateral. From the bank’s point of view, if I didn’t payoff the loan, they could take possession of the other house. This was the first time that I had heard about this but when I looked into it, it made sense. It certainly pays to ask questions!
R. T. How exactly do you borrow on your equity?
Aqlim: I went to the Scotiabank. I owed them the mortgage on house number three. I filled out the application and after a few formalities they gave me the money.
First, I had to pay to have house no. 3 appraised (this cost $120.) Second, I had to pay a lawyer for conveyancing (this cost $600.). As a result of these ‘formalities’ the bank decided that:
House number three, which I had bought for $75,000, was now worth $116,000.
Since I owed $68,000 on the house, I had an equity of $48,000 in it. In other words, the bank reasoned that since I owned 48/116 of the house, they were quite safe in lending me $25,000 (at 8.25% rate of interest) because the house was there to back up the loan.
The bottom line is that by borrowing $25,000 on house no. 3, I got the down payment for house no. 5. This transaction cost me money ($720) but it empowered me to take advantage of an opportunity which otherwise would have been lost forever. There is a good lesson in this kind of thing.
House no. 5 was sold to Dick (my realtor) and me by an elderly couple who were getting tired of taking care of the large lot and looked forward to downscaling to a condo. Dick was spending quite a bit of time trying to persuade me how good a deal the house was, so I finally said to him, “If it’s such a good deal why don’t you come in on it with me?” He agreed and proposed a 30% (him) / 7O% (me) split. Then I thought, “30% is not enough. Why shouldn’t he pay 50/50 so that if I sink, he will sink too?” He agreed to pay 50%.