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.
- Andrew Button | February 15, 2021