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July 13, 2018 | The Unplan

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The cost of money may have just crawled to a 9-year high, but it’s not all misery out there for borrowers. While banks were busy resetting rates higher yesterday after the latest BoC hit, one of them was cutting.

So if you’re shopping for a variable-rate mortgage, check out TD. Effective Friday the rate dropped (!) to 2.75% for a five-year VRM, which puts it at the bottom of the class among the Big Six. But it’s a limited-time come-on – just two weeks – and is available for both new borrowers and renewers.

This begs a question: does it make sense to go VRM in a rising-rate world?

Because most people look at mortgages emotionally, not practically, their answer would be no. But be careful. For example, the best five-year fixed rate at the green bank is 3.44%, which means the variable’s almost three-quarters of a point cheaper. Thus, it will take four more central bank increases before locking into a fixed rate would even start to make sense. The time line for that is probably 12 months out. If Trump blows up our car business, it might be a lot longer. Nobody knows.

But on a $500,000 mortgage, this is significant – $250 a month, or just over three grand a year. If the savings from a VRM-vs-fixed were put into a TFSA monthly and earned 7%, after five years you’d have $18,000 to take out, tax-free, and apply to the mortgage principal.

Besides, history has shown that borrowers who stay with variable-rate mortgages have fared far better over the decades than those who locked in. But try to telling that to most people. They’re not buying. After almost a decade of rates being in the ditch, this tightening cycle is scary. They sweat over every quarter point, often because they’re grossly over-leveraged.

Mostly, though, people have a bad attitude towards mortgage debt. They fret over home loans with rates in the 2-3% range and do silly things like accelerate payments, double up or make pre-payments, throwing all of their cash at paying it off as fast as possible, thinking this is the holy grail. It’s not. Often it’s dumb. And in the current real estate environment, it can actually reduce net worth.

Why take all of a family’s additional cash flow and whack it against a mortgage costing 2.5%, when a balanced and diversified portfolio last year scored well over 10%? (The long-term average is 7%.) If the investments were in a TFSA, for example, all gains would be free of tax. Would it not be better to build up liquid assets for 60 months, then apply the gains to the mortgage principal upon renewal?

And remember the value of diversification. Never, ever put all of your net worth into a single asset since you’ve absolutely no idea what the future will bring. What’s the point of spending years crushing mortgage debt, having no cash to invest in financial assets, only to retire and being forced to sell the house to generate an income stream? How about a serious real estate correction that wipes away gobs of equity after you’ve gambled everything on building it?

A house is not a financial plan. Or a retirement strategy. It’s just one aspect of it. Nor is mortgage debt inherently evil – especially when it’s available (like now) at 3% or less, while the inflation rate is over 2%.

Above all, remember that when a house is paid-off, you’re not ‘living for free.’ In addition to property tax, insurance, maintenance and often monthly fees, there’s the cost of keeping hundreds of thousands of dollars trapped and idle within your walls. This is money that, prudently invested, could double every decade and provide lifetime financial security. So if you do end up with fat equity and no mortgage, consider the potential of borrowing against the house to create a tax-deductible loan that can be used to diversity your assets. Not for everyone, but worth mulling.

So, yeah, rates will go up more. We’re probably half-way through the process. People who bought houses they never should have may well be pooched. Natural selection. But don’t let a gradual increase in the cost of money blind you to the fact mortgages will stay relatively cheap and houses are just places to live. When you get old, you don’t need one. But nobody can live without income.

Keep your eye on the puck

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July 13th, 2018

Posted In: The Greater Fool

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