The Personal Pension Plan: Using your home to fund it.

M P
Jan 16
3 min read

Borrowing $100,000 through a mortgage can open doors to new investment opportunities. This strategy allows homeowners to tap into their home equity, turning it into liquid capital that can be invested to potentially grow wealth. But using borrowed money to invest carries risks and requires careful planning. This post explores how to make the most of $100K from a mortgage, offering practical advice and examples to help you invest wisely.

Eye-level view of a suburban house with a "For Sale" sign and a calculator on a table — Using home equity to invest $100K

Choosing the Right Investments

With $100,000 in hand, you have many investment options. The best choice depends on your risk tolerance, investment knowledge, and financial goals.

Managing Risks

Borrowing to invest increases financial risk. Here are ways to manage it:

Calculate your break-even point: Your investment returns must exceed your mortgage interest rate plus fees.
Maintain an emergency fund separate from your investment money.
Avoid putting all $100,000 into one investment; diversify to reduce risk.
Understand the terms of your refinance loan, including prepayment penalties.
Monitor your investments regularly and be ready to adjust your strategy.

Tax Considerations

Interest on a cash-out refinance may be tax-deductible. Consult a tax professional to understand implications based on your situation.

Real-Life Example

Jane owns a home valued at $500,000 with $300,000 left on her mortgage and an amortization schedule of 25 years. She refinances for $400,000, taking $100,000 cash. She chooses the Scotia Total Equity Plan (STEP). This allows Jane to have two separate mortgages; One for $300k at 4% 5 years fixed, 25-year amortization, and the other for $100k at 4% fixed for 5 years at a 25-year amortization. Jane invests 100k in the stock market, purchasing the VEQT low-cost index fund with a self-directed brokerage such as Interactive Brokers.

At the end of 25 years, she has a net benefit of $1,005,112.22**. No new cash flow was required from Jane for the first 5 years, because Jane was able to cover the difference in her mortgage payment from a low-cost margin loan from her investment brokerage (Interactive Brokers, in this case). Her mortgage payment for a $100k loan would be $527.84 per month. After 5 years, when Jane's wages have increased, she then contributes the $527.84 out of pocket. Jane happens to be a Nurse at step 5 of the wage grid. In 5 years, her wage will go up approximately ~25% more than covering the $527.84 Personal Pension Plan contribution.

**I put together this rough spreadsheet mathematically illustrating the above example:

https://docs.google.com/spreadsheets/d/1tCfPn2CiRiCO_lkM8lgiQHokCgNLL_aTpBRDbLpAZyo/edit?usp=sharing

At the end of 25 years, Jane was able to create approximately $5,000-$6,000 a month in Personal Pension Plan payments from her $1,005,112.22 portfolio that should outlive her. She was able to create total tax refunds of $34,962.23 from the interest deductions on her borrowed funds.

It's always been better to take a loan and get invested now rather than start from zero and slowly put money away.

This strategy with Jane does come with more risks, as you are using margin loans to service the original 100k mortgage proceeds loan for the first 5 years . In the spreadsheet above, the highest loan-to-investment value was 27.57%, which occurred in month 56 and then gradually decreased from there. The maximum loan-to-investment value a typical brokerage will allow is 70%, so still well within limits. But a severe market correction could test those limits, so it's a good idea to have healthy savings as well.

Steps to Take Before You Borrow

Review your credit score and financial health.
Get multiple refinance quotes to find the best rate.
Calculate your new monthly payments and ensure affordability.
Plan your investment strategy with clear goals and timelines.
Consult financial and tax advisors for personalized advice.

Final Thoughts

Borrowing $100,000 from a cash-out refinance mortgage can be a powerful way to invest and grow your wealth. Success depends on choosing the right investments, managing risks, and understanding the costs involved. With careful planning and discipline, this strategy can turn your home equity into a valuable financial tool.

Take the time to evaluate your options and create a plan that fits your goals. Investing borrowed money requires confidence and knowledge, but it can open new paths to financial growth.