Do I Invest Using a HELOC or IBC? You NEED To Understand THIS

If you look at the documentation on probably any home equity line of credit in Canada, they're an on demand loan structure, meaning the lending institution can call that loan due versus in a mortgage contract. They can't necessarily do that the same way because you have a term for that contract. Recognize that they control that instrument, not you. And they can change the rules at any time and they don't need to ask your permission. What is the price on control? What is the value of control? What is the rate of return on control? Now when we think about again how these real estate assets are were assets and now they're turning into the Kiyosaki definition of liabilities, you know, people receiving these letters, these notices in the mail for the quote unquote, triggering interest rate on their variable mortgages. Now what exactly would this letter entail that you might receive?

So we know that when we borrow someone else money like as mortgage or private lending or heloc, however type of mortgage or money that we borrow from other people, there's a cost to that capital so we have to pay for it. And when we make amortization payment, there is a principal portion, there is an interest portion. So we know that normally there's about half and half or 80%, 20%. Slowly as time goes by, your principal pay down gets increased. However, in Canada you cannot have a term more than five years. So every five years I'll get the reset button if you know, refinancing before that. However, trigger point is means that if the interest rate increases, my interest portion of my payment really goes up so that my entire monthly payment are all filled up with interest only I'm not paying down any principal. And the bank is requesting more money because that all become the cost. They need you to pay down some principal. So at this time they're going to send you a letter saying that, hey, real estate investor, dear homeowner, now you have to increase your payment to be able to access the same amount of capital that you're borrowing from them in.

Order to maintain getting the amortization that the period of years that you set the amortization for to fulfill the obligation of that amortized period because the interest rates spike, you have to increase the overall payment so that you can still maintain that, that you know, completing the mortgage contract by the end of that period of time. And you know, we're hearing from people, I would say daily, if not certainly every week about receiving either these trigger interest rate letters or just in general about their mortgage payments increasing, etc. Now you know, if you just bought a house in the last year, you would have qualified for that house based, probably just barely based on those numbers, on an interest rate from a year ago. And now that interest rate's rising and you're finding yourself in a, in a different position where a lot of people had the expectation that interest rates were going to rise. But having the expectation and then having the actual knowledge and understanding of what that payment might look like is different. And this brings me to something, Terran, that you mentioned before thought was really powerful. You were reflecting on the red line and understanding what your red line is. So just give everyone an insight. And what do you mean by that? Yeah, for sure, for sure.

So it actually came up in a webinar that I was watching and one of the speakers talked about the red line and he talked about in, in the context that a lot of people are now talking about, okay, what should we be doing in this situation with the high interest rate environment, having variable mortgages and these variable rates going up almost every month? And what should we do? Should we, should we ride the wave? Should we switch to a fix? What's going to happen? Are they going to stop the raising the interest rates? Is it going to turn around soon? Is it going to drop down within the next year? People have these questions and they're looking for answers. And so I think you talked about the, the crystal using a crystal ball, right? No one has a crystal ball, so no one knows what the future is going to hold. But what we can do is we can address our situation by looking at our scenario, at our situation and analyzing the various scenarios we have in front of us, looking at all the scenarios, what scenario would you be most comfortable with and what would you be not comfortable with? And it's at the point at which you're not comfortable with something that is your red line. So, for example, if the interest rates went up tomorrow or a week from now and you ran the numbers and in that scenario it wouldn't be comfortable for you in the sense that it'd be too much money out of your pocket at that point, then you could consider that to be a red line at which you may consider switching your variable to fix so that you don't have to be in that scenario of leading more money. That's an example of a red line. So it's about finding your red line, looking at all the scenarios, whether it's riding the wave, whether it's switching to fixed, and looking at what can work with your situation. What are you comfortable with and going with that. And then once you make that decision, you have to be comfortable with the consequences that happen thereafter. That means if you switch from variable to fixed and the interest rates turn down in the next year or so, they start coming down. You have to be okay with that because that's the decision you chose. You don't know what's going to happen. You're doing it based on the now and what you're comfortable with. And once you make a decision, you have to accept the consequence.

Yeah, I love that. I think the idea that, you know, understanding your personal red line in many ways, but specifically when it comes to the interest rate environment makes sense. And you know, we think about the tachometer on a vehicle and you know that hitting that red line means like you're getting closer to putting a lot of stress on the engine. And if you're stuck in that red line for very long, you're going to blow the engine and then you have a really costly repair. So that same visual is really, I think, what people need to recognize when it comes to these kind of aspects on their financial life around the interest rate environment. And I think what people often don't know, you know, probably a seasoned real estate investor does, but the average Canadian who just maybe has had bought their first home or they've been living in a home for maybe 10 years and they've only really been experienced having one mortgage maybe with one lender, they haven't bounced around on multiple lenders before. I mean, I probably had 20 mortgages over my lifespan at this point in time. So I don't really fit in that bubble anymore. But there certainly is probably the bulk of Canadians who, you know, they've, they've stuck with one or two maybe primary mortgages over their lifespan. And if you think about being on a variable, well, in order to make the lock in take place, your lock in will adjust the payment even right now. So before you look at the interest rate increase, look at the, the change between locking in the rate today and recognize that the payment's probably still going to go up if you do that. But now you know what that number is. And now if you imagine, okay, let's assume that the interest rate goes up another 50 basis points, it goes up 75 basis points, it goes up 1%. So, so consider doing your own stress test to figure out where that red line is. If you look at your current variable, let's say in the lock in rate that you could get today with your primary lender, let's just say there's a $300 a month payment gap there. Well, now if the interest rate were to go up, your variable is going to go up, payments going to go up, the lock in rate payment is also going to go up. And so there's probably going to be a slight increase, the lever of payment increase too. So when you think about that red line, don't just look at it from what your current variable is doing, look at it from what that lock in mortgage payment will be. So project out in advance about that and say $5,000 a month, that's my cutoff line. So at what point of a locked in rate are you going to hit that number? In which case, where can the variable rate go to before you have to make the decision? So reverse engineer that outcome so that you can be confident in your decisions. You don't want to be like, oh man, the variable just went up more than I can handle now. I lock in, oh, well, that's going to add another $400 a month. I'm already down $400 a month past what I can handle. Right, that's a good point. You want to be really, really cognizant of that. I think it's really critical that you think about these things. And again, going back to home equity lines of credits and the real estate investors who have commentary like, well, hey, well, why would I go do a policy loan versus doing this and I can go put my home equity line of credit to work and I know I'm confident I can make a great rate of return. Well, I think if someone is so confident they can make a great rate of return, they might not be taking a good look around and assessing what's going on in the rest of the financial environment, you might be able to make a great rate of return. But I can tell you flat out from the conversations I've had with people less and less and less people are confident that they can do that. Now that's going to be a measure of skills, but it's also a measure of economic outlook and the locations that you're putting the money to work. So you have to have a high demonstrated knowledge about the things that you're doing. You know, Nelson Nash would frequently say that an investment should only be in something you know a great deal about. Anything else that you do is speculation. So if you're in, quote unquote, investing in the stock market, well, you just put a blindfold on and you're throwing darts at a dartboard. Now, if you spent 50 hours researching a given sector of the market. You can name every stock symbol in that sector. On a given stock exchange, you probably have some advanced level knowledge. If you've actually got courses and you're paying for software and you're looking at these charts every single day for an hour a day, and you've been doing that for 12 months, hey, maybe you have an advanced level of knowledge. Most people aren't doing that. So they're saying that they're investing in stuff, but they're not really investing. They're just throwing, you know, mud on the wall and that mud is their money. And they're hoping that the money sticks to something and grows. That's not the case for a lot of people and those individuals who aren't having that higher level advanced knowledge. And again, the same thing applies to real estate industry. You know, if you're going to real estate investor. Well, what kind? Well, well, I buy pre built condos five years out and then I hope to sell them later. That's not a real estate investor. No, that's speculation. Now if you were the developer of those condos and you bought the original land and you laid out the plan and you brought investors in to help fund the deal, so you had no money in the deal and you're going to exit before the condos go up, that's probably the real estate investor in that situation. You see the difference, right? So if you're saying that you're investing in something, you better bloody well be spending some energy and some effort researching what you're up to. You should actually have some level of knowledge there. If you have absolutely no level of knowledge, but your money is tied up into investments, then what you have is products that somebody sold you and you're not investing, you're basically twiddling your thumb, gambling for the shoe to drop.

Yeah, gambling, yeah.

You're, you're at the Vegas casino and you're rolling it, you know, you're rolling the dice at the roulette table basically is what's happening. And I think that having an understanding, that's really important. Now we have a lot of people who again, we kept talking about the Smith maneuvers. It is a great concept if you can implement it properly. The success of that really hinges on being able to have a positive return on your quote unquote investments. Well, that means you also need to know what you're investing in. So if you don't have those fundamentals down, you probably shouldn't be doing that strategy. Okay. And in an increasing interest rate environment, as soon as the Primary goes up. The cost of your home equity line goes up instantly, right away, no questions. The bank doesn't send you a triggering interest rate letter. You just deal with it like it happens now. And so that increased cost of borrowing, if that's starting to put a squeeze on your other resources as well, just because you can access money there, does it mean that you should. I had a conversation with somebody recently, I'll tell you guys about this. Jesus. This might have been the last week. Real estate investor, great person. They've got about, I think eight doors, right? Mostly semi detached houses, a couple single families. And so there's a lot of good equity built up in these properties, but there's no more cash flow. The positive cash flow has been squeezed because of variable rates. They just bought a personal house in the last year they just upgraded. Of course things were going good. Now they've, they've gone into a bigger home and now the price has gone up. Their mortgage payments gone up, I think probably $800 since they took possession in January of 2022. It's a pretty big increase over a timeframe. A monthly cost, I mean, just think about that. What's $800 a month over 12 months? That's $9,600 a year. It's almost 10 grand.

Almost 10 grand? Yeah.

Now 100% of that is an increase basically to interest in their life. So in less than one year an extra ten grand of interest is going to walk out the door. How much control do they have in that situation? Very little. They weren't implementing the process of becoming a banker. Now they're going to get started, which is great. And they're also doing the Smith maneuver. So they have a home equity line and if they tap into that home equity line, well, they're going to have a higher interest rate. They might be able to increase their write offs. They actually know what they're doing. Real estate investments, they've done a reasonable good job so far. But because they operate their rental portfolio in a rent controlled environment, they've got a bunch of long term tenants which everyone should be happy about. I'd be happy about long term tenants except I can't even raise the rent on the annual lease to match the inflation. I can't raise the rent on the annual lease to match what the property taxes have gone up in the last four years. If I had a condo property and there's an increase or a special assessment increase in the condo fees because that condominium can't find contractors to do labor intensive work. On the property because no one can find anyone to work these days. Then how can I raise the rent to accommodate that increase? It's not possible because of the restrictions around the control of my investment in that environment. So again, control, control, control. The three fundamental things around Infinite banking is about control. You know, in real estate it's all location, location, location. And if you can control the location of the equity, you're automatically in a better position than your peers.

I also wanted to add in that, Richard, that we talked about the control. We also talk about all the hoops and the loops that we need to jump when we get a mortgage. Now my question is why does a lender, why does a bank need to ask you for all those informations when they decide whether they want you to lend your money? Think about that. If you have a house and you secured a house and you wanted to borrow money from the bank, the bank is going to use your house as a collateral. They're going to learn to a certain percentage based on the value of the house. But why they have to ask for so many documents? Because they have to look at your income. If you are not paying that mortgage, they are going to garnish your income.

Yeah, they can legally go after lots of different things because you've signed a contract to make that payment. They don't want the house, the bank doesn't want the house. Their asset is not the house, their asset is the loan. Every single loan shows up on someone's liability sheet and it shows up on somebody's asset column. For a bank, loans is good and for the consumer loans is bad. Part of the work that we do with having conversations like this is we're trying to get that part of our brain that's in consumer world. We're trying to get take that consumer hat off and we want to put our banker's hat on. We want to recognize if you own the bank. How would you look at this deal differently? Right. If you looked at that amortization chart and you looked at the interest payments over a 25 year period of time, 300 months and you saw what accumulates and you also get the principal payments too. That's cash flow. That's an extended long term stream of cash flow. And every single mortgage payment that happens, the bank's risk goes down. So if you're the banker, don't you want to be in that position? So there's a reason why the biggest buildings in every downtown core of every major center have a bank's logo on it. It's not because they're stupid, it's because they're doing something that works really well for a very long period of time. So if you can mirror and model exactly what a bank is doing, but do it at a fractional scale relative to your family's household income, your family's need for capital outlay as it runs through your life, for all the crap that you buy, which includes investments, aren't you automatically enhancing the financial world that you live in? The thing is that people need to clearly and fundamentally understand you cannot get a better rate of return on anything if you don't first control the banking function as it relates to your needs, the control of the flow of the money. And it doesn't mean that you might not lose money on an investment. I know so many people during the 2006-2009 period of time in Alberta, huge amounts of land development projects. And you can invest some of your registered money or you can invest cash and you can, you would be part of this great five year project or this six year project. And then what would happen is, well, there was a big financial crisis meltdown, then there was some interest rate manipulation that took place because of it, and then there was a labor force problem and then there was an oil price drop. All kind of intersecting, all in a period of time around the 2008, 2009 Marketplace. And would you believe it, even the best of those projects, they might have been the best, absolutely best investment project on planet earth mathematically, on paper, on numbers, fundamentals, for all the right reasons when the project started. But add three or four years and some changing economic climate and what happened to a bunch of those projects? Where are they today? They're all gone, foreclosed into receivership. Someone got the money, but it wasn't any of the investors. I personally lost money in several of those deals and I know many other people who did. I, I've had lots of conversations with people involved in a lot of those deals and I know a whole bunch of people who lost money in pre construction condos. They started the building, hey, that is going to be a, you know, 15 story building. Well, they only got the first three stories built and then they couldn't finish the building. Who gets all the money? Nobody. You know, there's somebody got paid, but it's not the investor. So these kinds of things happen or especially over long term projects because you cannot control the economic climate for a long period of time. And then when they make their decisions, they made their decisions based on the information they had at the time. Yeah, this is a great project, this is a great project. But when the economic transitions took place, it no longer met that criteria and they couldn't complete the deal, couldn't complete the project. So I'm talking about millions and millions and millions of dollars stacked up from families all over the country, but primarily Alberta families, where they were putting their nest eggs, dissuaded with the rest of the financial system that are trying something new and they still ended up with nothing. Why do I mention that? That comes down to control. If they had a policy and they had taken a policy loan and they had made the exact same investment that went to zero, the exact same investment, don't they still have the policy?

Yes.

And if something happened to them, if you have the insurance and it's the right kind, tax free money is going to show up and solve a bunch of problems and I bet you it would replenish the loss of that big fat investment. What's the price of that? What's the ROI on that? And in the same environment, take my example, people, they did this investment, but if they borrowed it from the policy, loan probability is because that project was a long term project anyway. If they were abiding by the principles of Nelson's book and they were also making a loan repayment as we teach people to do, they would be bringing that balance down and their cash value would be accumulating. So shoot forward to when the project is gone because the market climate changes. It takes another two years before it goes into receivership. Your five year project is, by the time you find out your money's gone, it's eight or nine years later. Well, add eight or nine years onto a good whole life insurance policy. How much more money do you have? Quite a bit. It wouldn't have solved the problem of the lossy investment, but their original money, which was always in the policy, would have continued accumulating the entire time all that other crap was going on. I don't know too many people that understood Nelson's principles and were doing that at that time. But thankfully we now teach people how to do that. And so if you've experienced a loss like that, you can't claim the same thing after watching this video, after hearing this commentary, because you did know and you have the chance to do something about it.

Love it. Saving is different from investing. What is a better place to have your money saved in a whole life policy that you never, never lose the value and then you can still use that money to do the investment and kind of double Secure on that?

Yeah, absolutely. Just create an and asset. Now you have two.

When we borrow someone else money, we talked about all those controls that we are not having. But think about all the money is flows away from us. No matter its principal or principal you might be able to get back, but the interest is flowing away from you. Everybody have expiration day. When we have that day, a death benefit will pay out. And that's a reason that the insurance company is willing to lend us money. Because they have our death benefit there, they can use our cash value as a collateral. What they do is they put a lien on the death benefit. When that expiration date comes, the death benefit will use to wipe out what outstanding loan there is. The rest goes to our family, tax free to solve the rest of the problem. So they are willing to lend us the money so we can use our life and then now we can borrow money. Now we are utilizing a whole life insurance policies policy loan. And now we have the money flow is we have the money flowing back towards us as a policy loan repayment. So by utilizing a policy loan we have money flowing towards us. Who can calculate the rate of return on that? So their goals with dear real estate investors is a concept about utilization versus accumulation. Whenever we look at a deal that we want you to invest, whether is a private lending deal, whether is a multifamily deal or triplex fourplex, we are looking at in a dimension of accumulation. Do I put my money in this deal? Do I put my money in that deal? Do I? We allocate our money. But becoming your own banker, the infinite banking concept is talking about the utilization of our money that you cannot see from this level. You have a thinking about how your money is flowing towards that deal. And when you are funding that deal, when you are financing that deal, where is the direction of your monthly payment goes? And that is a thing that you cannot see see from all the numbers.

Essentially it's more about how you fund the deal versus actually funding the deal.

Yeah, the deal's gotta be funded somewhere. The money's gotta come from a holding tank, a reservoir. It's either your money, another investor or another lending institution's money, a pile of money, or it's the insurance company money. Meanwhile, if you're using the insurance company's money, that means you've got a good contract and your money is still secure with the insurance company growing every day. When you're taking a policy loan, effectively you're taking an advance on your future death benefit. And so we did an interview With Brian Bloom, who wrote a number of great books, Confessions of a cpa. And I love one of the things that he said. He said, he talked about buying a retirement condo for him and his wife because their kids had moved away to a different state. Well, that meant the grandkids were farther away. Well, we need to go buy a place down there so we can be closer to them. Where should we get the money from? Should we get it from a third party bank or should we buy the condo from your future dead self? Well, they decided to buy the condo from their future dead selves. It's like, when should we enjoy the money? Should we enjoy it when we're dead? It's going to be hard. Maybe we should just spend some of it. Now all you're doing is taking in advance. So you know, in the insurance industry they talk about this thing called human life value. Basically it's a multiplier of your income and assets. And it says, look, based on what you earn Today, whether you're 20 years old, 30 years old, 50 years old, there's a certain multiple of that income over a number of years that says if we just took your income and this number, this is about how much death benefit you're worth. Because really what we're solving for for your loved ones is that lost income potential, the amount of money that isn't going to show up because you're dead. Okay, that's basically what human life value is. Well, when you get the right kind of insurance contract in place and you're accumulating, you can actually accumulate more death benefit beyond your human life value. When we set these up. So that's pretty cool by the way. And when you're accessing a policy loan, it's kind of like you're actually living your human life value. You're able to pull in a future outcome, a future event into the world that you live in today as a utilization tool to accomplish more financial objectives than if you didn't have it. And the worst case scenario is somebody dies, in which case more money shows up tax free than you could use anyway. It's a win win situation all the way around. And something else that I thought was, you know, just kind of interesting in our conversation here right now. And for the last 15 years, really having a home equity line at credit has been a no brainer for people if they have any kind of good financial habits that they can make payments. Okay, Some people don't have the best financial habits and they shouldn't have had one started to happen. Down south of the border in the United States is they're already starting to freeze credit lines again. And now if you want to go apply for a home equity line of credit, a lot of places won't give it to you. Like I believe Wachovia bank used to get them there. They won't offer them anymore, so they're taking away these options. And in the 2008 financial crisis during the mortgage meltdown, what ended up happening is people who had open credit lines, the bank just sent them a letter and said, sorry, we've closed that down, you can't draw out of it anymore. Oh and by the way, here's your new amortization and your blended principal and interest payment which is substantially higher than the interest only payment you were making. Sorry if that puts you into foreclosure. Now that last statement I don't think they put on the letter, I just added that in, you know, my supplied. But that's basically what happened. So that took the problem that was already bad and it made the problem worse. Well why would the lenders do that? They did that because they were worried about the people using that financial instrument they gave them as an atm. And if you look at the documentation on probably any home equity line of credit in Canada, they're an on demand loan structure, meaning on demand, the lending institution can call that loan due, call the loan versus in a mortgage contract. They can't necessarily do that the same way because you have a term for that contract. So recognize that they control that instrument, not you and they can change the rules at any time and they don't need to ask your permission. So what is the price on control? What is the value of control? What is the rate of return control?

Alright everyone, so check out the rest of this awesome convo by clicking the video that just popped up on your screen and we'll see you on the Wealth Without Pastry channel.