Money is on sale!
Ted Rechtshaffen
Special to Globe and Mail Update
Published Friday, Oct. 15, 2010
This month, a client locked in a five-year mortgage at 3.49 per cent.
They could have done the same in 2001, but it would have been about 7 per cent.
In 1982 it would have been 18 per cent.
Even in the low-rate days of 1952, it would have been about 5.5 per cent.
Borrowing costs are lower than any time in modern history. This represents an incredible opportunity for those with the foresight (or fortitude) to take advantage.
Here are five strategies to consider:
1) When borrowing, lock in today’s rates. I know that at most times a variable rate is a better solution than fixed. Today is not "most times." If you are getting a new mortgage, lock it in. Even if it is only for three years, you can get a three-year mortgage today for under 3 per cent. The best three and five-year variable rates today are 2.25 per cent, but the Bank of Canada is almost certain to begin hiking rates again within six months. With such a narrow gap between a variable rate and a fixed rate, it simply isn’t worth the risk.
2) If you own a house, consolidate all your debts against your home. While credit card debt remains as high as 19 per cent in many cases, and other unsecured debts might be in the 5-per-cent to 7-per-cent range, you may have an opportunity to move those debts to your mortgage and gain significant savings. Even having a line of credit at prime + 1 per cent (4 per cent) can be consolidated into a mortgage for real savings. As an example, if your home is worth $500,000, and you have a mortgage balance of less than $400,000 (80 per cent), you will likely be able to consolidate other debts in your mortgage, up to 80 per cent of your home’s appraised value.
3) Start a business. As a business owner, I know that getting capital is not easy. The most common response I heard when I was looking many years ago was “use a line of credit secured by your house.” This might not be right for everyone, but I can assure you that you will not find a lower-cost source of capital (except those interest-free loans from family). In fact, I would look at using a fixed-rate mortgage as opposed to a line of credit if you require a larger amount of funds up front or want to secure the rate.
4) Borrow to invest. While some believe this is gambling, I can assure you that, unlike at the Las Vegas tables, the odds are tilted toward you. If you borrow to invest, the interest cost becomes tax deductible. In today’s market, you could do a five-year mortgage at 3.5 per cent, and if you are in the top tax bracket, this will effectively cost you less than 2 per cent a year. Over the past 60 years, the Toronto Stock Index has averaged annual returns of over 10 per cent. I am not saying you can count on these returns every year, but if your borrowing cost is under 2 per cent, and a dividend portfolio can pay 4 per cent a year just on the dividends, it can be a very powerful wealth-building strategy.
5) Borrow to buy more real estate. Imagine having an $800,000 house in Vancouver or Toronto and having no debt. You decide to buy a beautiful ocean-front property in Florida or California. The new property costs $300,000 – and they want cash. You can take out a mortgage on your Canadian property to possibly make the real estate purchase of a lifetime. If you are considering this, be sure to use a foreign-exchange dealer to save on exchange costs, and look into the tax issues of owning real estate in the United States.
Just for fun, you might want to file away this article and open it up in about five years. You may just wish you took the plunge when money was on sale.
Photo by: Dreamer7112
