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3 ways to benefit now from historically low interest rates

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There are those who think that interest rates are going lower. They may be right. But this column is for those other folks.

The ones who feel that the only place for interest rates to go from here is up.

While many of us follow the prime rate that is tied to a variable rate mortgage (i.e. prime minus 0.5%), fewer of us follow the 10-year Government of Canada bond rate. This 10-year rate is now down to 1.28%, virtually the lowest rate in Canada’s history.

When any financial data appears to be at an extreme level, there is usually a rare financial opportunity associated with it. Here are three possible ways to take advantage of this rare situation.

Consider taking the cash instead of the pension – it could be worth $400,000+ more

If you are in a defined-benefit pension plan and getting close to retirement, make sure you review whether you are able to take your pension “in cash.” This isn’t something that everyone should do, but the historical low interest rates create a rare opportunity for your pension to be worth a lot of money.

We have seen several people at large quasi-governmental energy providers with pensions that are presently valued at $2 million with today’s low interest rates.

Let’s assume this pension is based on a 65-year-old male, with a 60% spousal survivor pension. What happens if rates go up? You might think that this person who worked and contributed to their pension for 40 years wouldn’t care about interest rates, but the impact would be sizable.

If mid-term interest rates went up 2%, this pension that is worth $2 million today would be worth $1,580,000, according to Toronto-based actuary Daniel Kahan.

So retiring today and taking the pension would provide over $400,000 in extra cash than if our pensioner retired when rates were 2% higher.

The message here is that if you are considering retirement with a pension, it is always worth knowing the commuted value of your pension. If you were ever considering taking the commuted value in cash, now is probably the time to do it.

Take the fixed-rate mortgage – it only costs about 0.5% more

The variable vs. fixed-rate discussion could go on forever. I know that, historically, variable-rate mortgages have done better for consumers than fixed. In my opinion, now is not one of those times.

If you shop for the best rates on either five-year fixed or variable mortgages today, you can usually find a gap of just 0.54%. For example, you might get as low as 2.05% on a variable-rate mortgage, and as low as 2.59% on a 5 year fixed.

A lot can change in five years, and by taking a variable rate, you are getting only a 0.54% premium for taking this risk.

To oversimplify things, if short-term rates don’t change for a full year, but went up just 0.75% (to a rate that is still near historic lows) and then kept that rate for four years, you would still be slightly better off financially with a fixed rate.

Keep in mind that as recently as 2007, the bank prime rate was 3.65% higher than it is today. It took just 18 months for the rate to drop 4.25% from 2007 to 2009. If you are in a variable-rate mortgage, you don’t want to even think about a 4.25% increase in 18 months. At a real “cost” today of just 0.54%, I think paying this extra 0.54% for the ability to lock in a fantastic rate for five years may be a significant financial win today.

Consider buying an ETF that shorts long-term bonds

In 2014, the iShares 20+ Year Treasury Bond was up 28%. It was up another 8% in January. This isn’t a normal return for a bond ETF. The reason it did exceptionally well is that long-term bond yields had dropped so low.

When a bond investment does that well, you have to be a little wary of what will happen next.

If one believes that the U.S. long-term interest rates are truly near the bottom today, one of the best investments would be something like the ProShares Short 20+ Year Treasury ETF (symbol is TBF). This ETF essentially works the opposite of the iShares ETF. The ProShares Short ETF was down roughly 25% in 2014.

Of some interest, this ETF can also be used as something of a hedge against the stock market. Certainly one of the biggest fears of the stock market is a return to rising interest rates. In that event, this ETF will perform very well at a time when the stock market is not.

We don’t know if we are truly at the bottom for long-term interest rates, but we do know that we are currently outside the long-term historical norms. Just as technology stocks in 1999 had valuations outside of long-term historical norms, and today’s oil price declines have now reached historically significant levels, today’s long-term interest rates likely represent a rare opportunity for significant wealth creation – if you have the guts to move in the opposite direction of the herd.
 
Reproduced from the National Post newspaper article 4th February 2015.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Renewing your mortgage? Here’s why you should pick up the phone

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It is mortgage renewal time in my house.

I am one of those debt loving people who believe I can do more with my money by carrying a big debt at 3%, than by paying off my house and using up all that cheap capital – but that financial idea is a story for another column.

So, even though my mortgage comes due in October, I decided to lock in a rate four months earlier at a different institution at 2.79% for 5 years fixed. I was thrilled to have another five years of cheap money.

Even though I had already locked in elsewhere, I was interested in what my current mortgage lender would provide. I waited and I waited. Just four weeks before it was due for renewal they sent me a mortgage renewal notice. They could have sent it to me two or three months before my mortgage came due, but they may prefer to leave consumers less time to shop around and more inclined to just renew.

Here is where it gets interesting. “Please indicate which option you are accepting by signing your initials in the appropriate area indicated and return your signed agreement,” the letter stated.

I could just initial the 5-year fixed rate — for the princely rate of 4.79%.

14022838_sFurther on in the letter under a section called “Get the best rate,” it offered to extend to you our special interest rate hold guarantee provided if I signed by my renewal date. But all this says is that if the rate went down between now and about three weeks from now, I would get the lower rate.

This is a full 2% higher than what I am actually going to get somewhere else. If I had a $500,000 mortgage, this would cost me $47,600 more over 5 years by ‘just signing here’ vs. going to a mortgage broker three months in advance.

Just to be sure that I wasn’t missing something I called to make sure that I had the correct instructions and rate on my renewal. An interesting thing happened when I called. In about 30 seconds they said “I can actually get you a rate of 2.99% for 5 years.” I asked why my rate was 4.79%, and they said that this is the standard rate, but I can get this better special rate.

Doing the math, that phone call, using the same $500,000 example, would have saved me $42,800 over 5 years. That was a pretty valuable phone call.

I asked the kind sir on the phone how often people just sign the renewal form, and he said ‘quite a few.’

If a bank gets 5,000 people in the same $500,000 example to sign the renewal, that adds $42.8-million in profit to their bottom line each year.

Please do not automatically sign the friendly mortgage renewal form. At a minimum call to negotiate or call a mortgage broker to get the best deal for you. If you feel some sort of loyalty to your current mortgage provider, then be sure to see someone in person and ask for the very best rate that they give their very best customer. Your future net worth will be glad that you did.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 16th September 2014.

What is your mortgage number?

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Most people want their mortgage to be paid off.

While in some cases, if the after tax debt costs are low enough, and there are alternatives to use that cash for higher growth, then having a mortgage can actually add to your wealth.

Nevertheless, for those who want to be mortgage free, here are a few essentials to empower you in the mortgage process.

  1. A rate is a rate, is a rate, right?
    Most Canadians will secure a mortgage exclusively by trying to find the lowest interest rate.  While the interest rate is very important, the majority of Canadian will have to break their mortgage and pay a significant penalty because of the conditions that were attached to that great rate.  Don’t treat your mortgage like a commodity.  The structure of your mortgage and what you would like to achieve with it is more or equally as important as the interest rate for it.
  2. What is the plan for your mortgage
    Do you have an accelerated plan for your mortgage?  You should not just put your mortgage on auto-pilot and resign to the amortization that was set for you by your lender.  Have a goal to pay it off faster.  Your mortgage plan should fit into your overall life plan.  Many people try to be mortgage free at all cost and by doing so they neglect their greater financial plan.  By doing so they end up having to raise a mortgage in their old age to support themselves.
  3. Just sign the mortgage offer
    85% of Canadians sign the mortgage offer that is presented to them by their financial institution.  We have great financial institutions in Canada, but they don’t have natural incentives to provide borrowers with the lowest interest rates.  It is up to each borrower to make sure that they have the best interest rate for their conditions.  Look at all your options and don’t be afraid of the small mortgage lender that will provide you with excellent products.
  4. Can a refinance get you ahead?
    Many people are afraid of refinancing their mortgages because of the penalties associated with it.  What if this could be done by keeping your payment the same and reducing your mortgage by 5 years?  Before you decline the opportunity to refinance your mortgage or just rush into it allow a professional to do the benefit analysis for you.  If you do it for the right reasons you could save tens of thousands of dollars and reduce your mortgage by many years.

Article submitted by Jacques du Preez of Mortgage Allies jacques@mortgageallies.ca 1-888-707-4995

Best 10-Year Mortgage Rate Ever?

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In April 2008, our best 5 year fixed mortgage rate was 5.59%.  Most banks were over 6%.

At the time, this was considered a pretty good 5 year rate from a historical perspective.

Now it is June 2012 – just over 4 years later, and we can offer our clients a 10 year mortgage with a rate as low as 3.79% (certain conditions would apply).  This is the lowest 10 year mortgage rate in history.

Will we ever see a lower rate?  It’s possible.  There has been talk of rising rates for quite a while, and we have yet to see it.  In fact, the reason this 10 year mortgage is available is because long term bonds are currently at all time lows.

Having said that, at TriDelta Financial we try to respect history.  When something is so abnormally cheap from a historic perspective we find it is best to ignore the current chatter, clench your teeth and dive right in.

To us, a 10 year mortgage as low as 3.79% (subject to change) is one of those rare cases of something being so abnormally cheap from a historic perspective that you want to take advantage of it before it goes away.

Now there are some drawbacks to a 10 year mortgage.  The biggest is that it is tough to predict the next 10 years of your life.  If you end up moving out of town and have to sell, or for some reason you want to break the mortgage (like interest rates went down another 1%), then a 10 year mortgage will have been a mistake.

However, we believe it is ideal for those with the following characteristics:

  • Risk averse.  Don’t want to have to worry about interest rates for a very long time.
  • See the odds as very low of you planning to move or leave your city in the next 10 years.
  • Want to be able to plan around fixed mortgage costs that won’t change for 10 years (unless you choose to pay it off sooner).

There is definitely a value in certainty, and a 10 year mortgage brings that.

In addition, we believe that over the next decade, there is a very good chance that you will look back and find that a 10 year mortgage at this low rate ended up also being one of the very best financial decisions that you ever made.

If you or someone you know is interested in taking advantage of this great opportunity, please don’t hesitate to call or email.

This article was written by Ted Rechtshffen, President and CEO of TriDelta Financial. You can follow us on Twitter or leave a comment below. We’d love to hear from you!

Why a Fixed Rate Mortgage is now Better than a Variable Rate Mortgage

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5 Surprising Ways Debt Financially Helps You

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The smartest business people have always recognized the value of debt in building wealth. The idea that all debt leads to financial ruin can often be wrong.

To take a closer look at when debt can be  good, here are five cases to consider:

1) When you can use borrowed funds to earn a greater after-tax return than the after-tax cost of borrowing. For example, if the debt costs you about 4% annually after tax deductibles to borrow, and you can make after-tax returns of greater than 4% then you will grow youth wealth by borrowing and using those funds.  Two Yale professors, Ian Ayres and Barry Nalebuff recently found out that in analysis going back to 1871, if younger investors used margin to increase their investment power, on average, they could retire six years earlier and still achieve the same retirement lifestyle.

5-ways-debt-is-good2) When you don’t have the cash to buy something today, but are very confident that you will be able to pay for it over time, it can be good to take on debt. The most common case of this is buying a house. Without debt, very few people could ever buy their first house.

 

3) When http://healthsavy.com there is a time-limited opportunity to buy something of value. A good example of this might be an ability to buy private company shares, invest in a company matching program, or make an RSP contribution in a year when your income is high.

4) When there is a window of time to do something special. For example, if an older person dreams of taking a big trip somewhere expensive but waiting on better cash flow, they should consider getting a line of credit and taking the trip anyway. Health reasons might detract future possibilities.

5) When you believe that future credit will be hard to come by, it is often good to arrange for credit or debt today. An example might be if you are currently an employee but are planning on starting a new company or becoming self-employed. The time to get debt is before you change your employment.

For all the scenarios above however, it is important to have a strong payback plan.

What is important to remember is if you arrange your debt options through careful planning, for a specific purpose and based on your ability, carrying some debt might be helpful for you.

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