Warren Buffett doesn’t give stock tips, but he’s given plenty of “general” financial advice over the years. Recommending that people avoid credit cards, save money, and invest in index funds, the “Oracle of Omaha” has shared plenty of money ideas with the world.
Today, he has a clear recommendation: borrow while interest rates are low.
Thanks to the COVID-19 pandemic, we’re seeing unprecedentedly low interest rates across the Western world. That includes the U.S. as well as Canada. To help the economy along during lockdowns, central banks have lowered interest rates to sub-1% levels. As a result, bank interest rates to consumers have declined as well.
Warren Buffett hasn’t been big on public appearances lately. But he did find the time to comment on the present low-rate environment, saying: “This is a very good time to borrow money, which means it may not be such a great time to lend money.” In other words, now is the time to borrow and get one over on the banks.
For most people, the best way to do that is through refinancing mortgage debt. Not everybody is in a position to borrow large sums for business investments like Warren Buffett is, but anybody with a home can lock in a lower interest rate. Over time, the savings can start to add up.
Interest rates are shockingly low
Today, Canadian mortgage rates are among the lowest they’ve ever been. Some rates we’ve seen advertised recently include the following:
- Royal Bank: 2.09%.
- TD Bank: 2.14%.
- CIBC: 2.55%.
These low rates are the highest rates the banks above are currently advertising. If you’re willing to look at variable rate mortgages, you can find far lower rates than those. So, clearly, we’re seeing pretty low interest rates on mortgages these days. That makes a strong case for refinancing. However, there is one risk to watch out for.
One risk to watch out for
If you decide to refinance your home, there is one major risk you need to watch out for: penalties.
Banks often charge people lump sums when they choose to refinance their mortgages. Sometimes, these fees can be as high as $10,000. Whether refinancing is worth it after these fees is something you’ll need to work out mathematically. It depends on whether the money saved on interest exceeds the penalty. In most cases, it is worth it, but you need to have the cash ready to pay the piper.
Not a homeowner? You can still take advantage of the real estate boom
If you’re not a homeowner, you might feel left out of the refinancing party. People are getting lower rates on their existing mortgages and others are buying homes are rock-bottom rates. If you’re not in a position to buy a home, it may seem like you missed the boat.
Fortunately, that’s not the case. Houses are just one way to invest in real estate. If you’re a small-time investor, you can also invest in REITs like RioCan Real Estate Investment Trust (TSX:REI.UN). REITs are pooled investment funds that hold large portfolios of investment properties. Like individual home buyers, they benefit from low interest rates when they go to finance new investments. And in many cases, they offer high dividend yields.
For example, RioCan yields an impressive 5.8% at today’s prices. That means you get $5,800 back in dividends each year on $100,000 invested, which compares favourably to rental income on a house. If you rent out an apartment in a $500,000 house for $1,000 a month, you get $12,000 a year, which is only a 2.4% “yield.” So, REITs like REI.UN may beat rental houses on income.
Of course, such investments do have a degree of risk. RioCan’s collection rate suffered in 2020, because of the COVID-19 pandemic, which killed many of the retail businesses it rented to. These are risks you need to be aware of. If you’re concerned about them, you might want to research healthcare REITs like Northwest Healthcare Properties REIT, which have stable, government-backed revenue.
Some of these stocks are Warren Buffett favourites:
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Fool contributor Andrew Button owns shares of TORONTO-DOMINION BANK. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.