How to BEAT the Banks

Money is an interesting topic to bring up; it’s like politics – sometimes it’s better to not bring it up. However, I wanted to use this week’s Insight Article to briefly talk about how money is practically free at this point if you’re buying a property, and quite frankly, how to use the banks to your advantage (instead of the other way around!).

Ridin’ Low – We’ve been in a low interest rate economy for over 10 years now. My definition of “low interest rate” is a rate that is less than 5%, but I know it’s all relative. 20 years ago, it was closer to 20%. Less than 9 months ago when I wrote about interest rates, there was a lot of noise around rapidly increasing interest rates which caused everyone to freak out.

READ: New Mayor and Interest Rate Increase – What Does This All Mean

Below is chart of the history of the Bank of Canada’s overnight rate since 2007: Fairly LOW. Despite what the graph looks like, you’ll notice the highest point is 4.5% – that sounds like a low interest rate economy to me.

Accepting Change – As it stands now, the Bank of Canada is done raising rates until 2020 and there is a 40% chance of a rate cut. It’s kind of crazy how things changed so quickly, in the matter of only 9 months.

Regardless of how you may react emotionally to these announcements, things will carry on and there is really nothing you can do. As an example, when I closed my last property in December 2018, the rates were projected to go up another 1% in 2019. As hard as it was at the time, I took my own advice and went with a variable interest rate. Look at where we are now!

Free Money, How Do I Get IN on It? So how is money basically “free”? Of course, this is my perspective, my opinion. In our economy, if the money you have isn’t earning a return over what the projected inflation rate is, then your money will be worth less and less over time.

For example, if you left $100 dollars under your mattress 10 years ago, you likely can buy less with that $100 now than you would have 10 years ago. Simply put, that’s the factor of inflation.

The projected inflation rate in Canada is about 2%. This means that if you are not making 2% return on your money, then you’re essentially losing money. So that means if you have money in a GIC (Guaranteed Investment Certificate) account making 1%, then you’re actually losing money. Products like GIC’s are often marketed by the banks to you as a way for you to make a “return” on your money. But what they have intentionally NOT disclosed to you is that you won’t win with GIC’s in the long run if you factor in the concepts of time value money and inflation.

With mortgage interest rates as low as they are now at 2.5%, you’re really only paying the spread (i.e., the difference) between the rate of inflation at 2% and the posted rate of 0.5%. Just take a look at all of the promotions that are being marketed by the banks right now (see below).

So this means that for every $100 dollars you borrow, it’s only costing you $0.50. Do you think you can make more than 0.5% return in real estate each year?

The answer is 100% yes. If you are looking to see how you can profit from this (basically) free money, reach out to us here at PPTO to chat about how to potentially put this free money in YOUR pockets!

So why is this happening? Well, there are a myriad of reasons as the economy and the interest rate usually isn’t only driven by 1 reason, but rather, it is a combination of the following:

  1. The banks are starving for mortgage business. They can drop their rates to increase business – this is the fundamental Demand Curve in economics: lower price leads to higher quantity for product demand.
  2. The bond market, which is correlated to the fixed mortgage, is also decreasing thereby forcing rates down. We’re also in a weird situation right now where the fixed rate is lower than the variable. This is not normal, so you should 100% take advantage of this.
  3. Donald Trump is against interest rate hikes right now and Canada usually follows the US interest rate changes.
  4. The Canadian dollar is performing a bit too well right now and in order to maintain the cost for our exporting partners, mainly the US, we need to keep the interest rates low.

The Wrap – Is this current trend going to continue? I think so. However, like I said earlier, things can change quite rapidly. However, you could always take the route of having peace of mind by locking in your next investment property with a low fixed rate of 2.5% right now!

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