November 23, 2020 | Lighten Up

Let’s review, shall we?

Stock markets have been on a tear (the Dow’s near at an all-time record level). B&D portfolios have sloughed off the worst pandemic in modern history, political crisis plus near-record volatility. Yawn. S’all good. Commodity prices are rising with oil seeing the best pop in months. Bond yields have started to plump again.

Why?

Vaccines. Three of them now. Distribution chains are being built. The new American president’s first task will be ensure the pandemic, deaths, hospitalizations and economic destruction ends. Yes, it’ll take months. But the direction is clear. We know where we shall be by this time next year. It will be better.

This pathetic blog has reminded you since March that all pandemics are temporary. They hurt. Then they pass. We told you to stay invested. Ignore the noise. Don’t turn temporary paper losses into real ones. Have faith. Trump would be gone. Science would out.

Now it’s assured this will be the case. Global growth will restore. Demand for commodities will rise. Consumer spending and corporate profits will return. And out of this dark time comes dramatic biotechnology – ‘messenger’ vaccines with the potential to improve human life in important new ways. This is why markets are behaving as such. Stocks up. Bonds down. Yields increasing. Inflation will follow as the GDP plumps. Then rates. So, yes, lock in your mortgage now.

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“I have been reading your blog for many years – thankful for the guidance!” says Jeremy by way of the MSU.

Question: Is it better to continue with a HELOC of $450k at 3.05% (Manulife One) and put more income towards paying down the principle, or to lock in $450k at a fixed 5yr rate of 2.59% (Manulife One) with an amortization of, say, 20 years for a reasonable monthly payment of just over $2k?

We have had the HELOC since 2008. Have registered and non-registered investments totalling over $300k and contributing to 2 defined benefit pensions. Household income over $200k. Toronto detached house currently worth 1.5 million.

It seems we should just be more diligent to keep saving as much as over the monthly interest payment of the HELOC, which would decrease the principal. We have benefitted from having cash on hand to use and invest but now wish to focus more attention on reducing mortgage debt.  Paying too much to the bank…

Face it, a 3% loan rate these days is excessive. Even the big banks are shoveling money out the door at 1.8% (although rates have actually started to sneak higher). But, of course, with a HELOC you need make interest-only payments, while a mortgage is amortized, with blended payments, meaning a portion of the debt is repaid with each one. (If the home equity LOC money was used for an investment, 100% of the monthly interest payments can be deducted from your taxable income.)

First, forget Manulife. Rates are too high and a 2.59% mortgage is excessive. Second, if you have trouble repaying any debt on a $200,000 household income, you’re spending too damn much on frills like children. Buck up. Do a budget. Third, converting the HELOC to a mortgage at a much lower rate with a weekly-pay feature (the correct kind) will let you rapidly reduce the borrowing.

But even without the weekly-pay benefit, the mortgage – while costing you $9,000 a year more in cash flow than the interest-only HELOC you now have – would reduce the debt over five years by almost $75,000. That’s how dramatic the impact of these generationally-low rates is. The principal repayment portion of the monthlies is massive.

Finally, of $1.4 million in net worth, close to 80% is in one asset. The house. Yes, you have DB pensions, but that’s not money you control and job loss can happen. The fact you’ve had a HELOC for the past twelve years and haven’t paid it off is not cool. Nor does it sound like it was an investment loan. And I hope the pensions are fat, because three hundred thousand is a dangerously small nestegg. If you have defined-benefit pensions, hopefully the bulk is safely inside TFSAs instead of RRSPs – which can flip you into a higher tax bracket after age 71. That’s apparently when men reach their sexual peak. Or die trying.

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Next Monday, kids. That’s when Chrystia will tell you what the pandemic damage has been and where we may be headed. It’s been a long time – well over a year – since we had a regular federal budget, and Dog only knows when the next one will come. The event on November 30th will be another ‘update’, which means she can lie with impunity. And smile.

In July the T2 government said the deficit would be $343.2 billion, an all-time record (the previous high was Harper’s $56 billion hole during the credit crisis). Since then the Libs have announced new spending initiatives (like pharmacare) plus more Covid relief (an extension of CERB-like payments plus new business subsidies). And now we have a second wave of the virus surpassing the first. Ottawa’s spending, relative to the size of the economic, is the most profligate in the world.

So here’s your assignment. What will be the new deficit number? Post your estimate.

The winner will be given a guest column on this blog. Plus, you can moderate the comment section for an entire 24 hours. Then we will pay for your therapy!

Garth Turner November 23rd, 2020

Posted In: The Greater Fool

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