Is it better to use your home equity to pay off debts or to use money you have already invested?
Asked by Anonymous, Alvinston, ON
There is no right or wrong answer to this question as it depends on your personal tolerance for carrying debt, as well as a number of other financial factors. Generally speaking however, to use your home equity to pay off more expensive debt like credit card debt, you would likely be reducing your interest expense for carrying the debt, but your debt position would not change. It would just be transferred to your home equity. If you are comfortable carrying debt and incorporate a repayment strategy, then reducing your interest expense would be a smart way to go.
Another strategy that can be used in the above scenario is to liquidate some of your investment portfolio to pay down the debt, and then use your line of credit to buy back your investment assets. You would still have the debt in this case and would need to incorporate a repayment strategy, but your interest expense would be tax deductible against your investment income. You should consult your investment advisor before implementing such a strategy as one needs to be careful of the tax consequences that may be triggered upon liquidation of assets in your portfolio. Careful attention must be paid to this as it could make paying off your debt quickly less effective, in that you may end up just exchanging interest expense for tax expense.
If you have less tolerance for carrying debt and you have assets in an investment portfolio that can be liquidated without triggering onerous tax, this may be the way to go as it gets rid of the debt immediately. Again, discussion with your investment advisor would be recommended to explore the tax consequences of liquidating investment assets.