Many people think that if they had enough money, they wouldn’t have to worry about taking on or managing debt because they won’t need it in the first place. Those people might be surprised to learn that people like Warren Buffett, who are sitting on cash hoards of billions, also take on debt. Buffett’s Berkshire Hathaway recently took on about $1.8 billion of debt to capitalize on the historically low interest prices.
For people and organizations who don’t have trouble managing their debts and have assets several times larger than the debt they are taking on, it’s just another investment tool. But for everyday Canadians, taking on debt to make investment decisions might not be a smart move. But there is another way that they can take advantage of the low-interest rates.
Renegotiate your mortgage
According to an estimate, a household with healthy finances should spend 30% or less on housing. A substantial portion of this 30% is made up of mortgage, which is why lenders have Debt-to-Income ratio requirements. Canadian households where housing costs more than 30% might be financially distressed.
Thanks to the interest rate cuts, you may now be able to substantially bring down your housing cost by renegotiating your interest rates with your lenders. If you are on a variable mortgage rate, you will benefit from the low rates automatically. But if you have a long-term fixed mortgage and you aren’t due for renewal for some time yet, it might be in your favour to consider an early renewal.
There are a few other considerations, like your current employment status, finer points of your mortgage, penalty/additional cost of an early renewal (so you’ll have to run numbers on the cost-benefit analysis of an early renewal), etc. But if you can, following Buffett’s lead and using the low-interest rates in your favor can be a considerable change.
Across the border, millions of homeowners can cut their monthly mortgage payments by over US$280 (on average). If you can save that kind of money every month by renegotiating your mortgage, it’s definitely worth looking into.
Save to invest
Say you can bring your monthly mortgage payment down by $250. That’s an additional sum that you can get by without, so instead of wasting it, you can use it to invest. And if you want your “real-estate” money to go to a real estate stock, consider buying shares in Northview Apartment REIT (TSX:NVU.UN).
It’s a modest growth stock with a juicy yield of 4.78%. And though its capital growth potential is currently in question, the yield and monthly payouts might be reason enough to lock in this REIT. The stock is currently trading at just 7% higher rate than its pre-pandemic spike. It recovered quite rapidly after the crash, but the price has been very stagnant since the start of May.
This is currently the prevalent theme in large apartment-based REITs. The dividends look secure enough, with a payout ratio of 56.5%. The company did suffer a huge blow to its net income, which was reduced to one-fifth of what it was in the second quarter of 2019. The situation is likely to get better once the economy has recovered sufficiently.
Warren Buffett knows how to take advantage of a fallen market in more ways than one. Leveraging low interest debt is a financial tactic, just like pinpointing discounted securities that have a solid chance of recovery. For retail investors, the strategy doesn’t translate quite as literally, but taking advantage of low rates by renegotiating your mortgage can be a very powerful move for your financial future.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares).