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August 11, 2020 | The Long Game

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.

Let’s noodle this.

Beating the virus apparently means spending more money than anyone could imagine. Billions. Trillions. Cash nobody has. All debt.

It’s working. The economy was turned off to stop Covid but all this cash kept things functioning, Thumbs up, baby. But as every family knows, debt doesn’t disappear. There are consequences. Let’s think about that for the next 700 words.

Those CERB cheques, business bailouts and payroll subsidies are all being made with newly-printed money, since Ottawa has no reserves. Ditto in Washington. The more money that’s created, the less all the existing money is worth – which is exactly what the gold-lickers have been yammering about.

But for most people the legacy of the bug will come down to one thing. Inflation. Not out-of-control hyper-pricing. No Venezuela or Zimbabwe. Just steadily higher costs and, yes, rising interest rates. Especially when economic growth resumes with a vengeance later in 2021 (as the vaccine arrives) and thereafter. It’s a reasonable bet central banks will gradually tighten, starting in 2023. By 2025 these sub-2% mortgages we’re seeing will be like the bittersweet memories of your youth.

Could inflation return to, say, 4% or 5%? Of course. GICs might yield four points again. Home loans could rise to 6%. Easy. Not soon, but with the legacy of Covid, abysmal public finances and the insatiable need for debt financing by governments it seems completely logical this is in the cards. Moreover, central banks will be desperate to raise rates in the coming years – to prepare for the next economic plop. If the cost of money doesn’t increase in better times, it cannot be crushed to heal a problem. Those who believe rates will be at zero for a decade simply do not understand.

So, imagine if you could insulate yourself from the increases until, say, 2030. How smart would that be?

Seriously wise.

You now have a rational way to do this, which is the 10-year mortgage. The cost of this borrowing has collapsed in recent weeks to just over 2.5%. That is about 60 basis points more than locking up for a five-year mortgage and almost full point more than going for a one-year term with a low-cost lender who might also sell donairs.

Here’s why this kind of loan makes sense. First, rate protection. There is (in the mind of this pathetic blog) a 100% chance the cost of money will be reasonably higher in 60 months and heroically greater in 120. No way the CBs are staying at these levels for a day longer than necessary. As the economy reopens, repairs, climbs and grows (this is inevitable since pandemics are temporary) so will key lending rates.

Second, qualify for a mortgage once, then forget it. No stress test later. No bankers pocking through your credit history. No worries if you get laid off, retire or lose your mind and start a small business.  And, third, you know what your monthly payment will be for a long, long time. That allows for better planning, saving, investing and getting ready for what lies ahead. In a world of surprises, this is one less.

But there are downsides, too. The 10-year mortgage costs more (slightly) than a shorter one, so you have to play the long game. Over time the savings could be outsized. But if you happen to sell and move in the first five years, a significant penalty will enue – not only the higher interest rate, but a mortgage-break fee that won’t be pretty.

After that, clear sailing. The Canada Interest Act dictates all mortgages become open after five years, so the loan can be paid off in the second half of its life with a penalty equal to only three months of interest. Not so bad.

As you may have noticed lately, people are nuts. They’re treating real estate the way they did toilet paper in March. FOMO has returned, panic buying is everywhere and houses are selling as if there were no recession, no double-digit unemployment and, oh yeah, no global pandemic with our closest neighbour being the epicentre of infection and death. Go figure.

But if you’re buying, refinancing or coming up for a mortgage renewal, seriously consider the decade-long option. The cost has never been lower. The benefits never more obvious. The peace of mind alluring.

Come back in a decade and see. In case I’m daft enough to still be here.

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August 11th, 2020

Posted In: The Greater Fool

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