The viral tsunami; COVID-19 Gems

BY JAY BRIJPAUL

Prior to the pandemic, buyers were battling for homes. Bidding wars became fierce. Then, on March 3^rd, Ontario reported twenty cases of a new coronavirus. Soon, the city was on lockdown. Many became jobless. The market chilled. Interest rates fell. The government gave grants. Mortgage payments stalled. COVID-19 retracted. Little by little, we are opening the economy. The viral tsunami has begun to slowly subside, and under the rubble are gleaming gems.

The Bank of Canada chopped interest rates. Many homeowners with mortgages that were up for renewal are locked in. Those that are not up for renewal can increase their term to five or seven years. Lenders would blend the portion of the original rate with the portion of the new term rate. This cocktail is financially intoxicating because of the effective lower rate. There is no penalty to do this. High interest rate credit cards can suck the lifeblood out of affordability. We have the cure. Homeowners can increase their mortgage and pay off the cards. For example, interest paid on $25,000 credit cards at 18% is around $2,300 monthly. Interest paid on $25,000 mortgage at 2% is around $40.00

People save money in their bank accounts and investors borrow and invest it. The low interest rate they pay is almost like getting free money. The first step is to arrange a home equity line of credit (HELOC). Withdraw a portion for a down payment on an investment property. The next step is to collect rent. Other investors use their HELOC to buy premium stocks at half-price. Another clue is to borrow from the HELOC at a low interest rate and lend it as second mortgage at a high interest rate. For example, if we take $50,000 from the HELOC at 3%, we will pay $122.00 monthly interest. If we lend it as a second mortgage at 12.5%, the borrower will pay $518.00 interest monthly. The profit is $396.00 monthly. We can use the profit to pay the monthly payments for a new car, for example.

With social distancing, businesses had to evolve. Many companies adopted new work-from-home strategies. Virtual meetings became popular. Some people do not need to commute to and from work anymore. Many buyers are moving to small towns. Prices there are more affordable. Prior to the pandemic, many people had to live close to work and pay a colossal amount of rent. Homeownership was only a dream for many.

Tourism has crumbled. Immigration has clipped and companies like Air BnB have suffocated. A barrage of rental properties have become free and rental rates are now more cost-effective. With cheaper rent, some investors will choose to sell. With job losses, many homeowners took a mortgage deferral. They can avoid paying mortgages for six months. After the term, these homeowners will be left with a higher mortgage payment than before. Some will sell. Inventory will swell and, in the fall, prices will fall. A cut in price will grant more buyers entry through the doors of homeownership.

Seniors in retirement homes and long-term care centers had first-hand experience with the epidemic. Moving forward, many will choose to live in their homes instead. Reverse mortgage is becoming popular. Homeowners can borrow against their home to supplement their income while living there. The interest rate and the setup costs are higher on reverse mortgages compared to regular ones. The disadvantage is that the equity on the home will erode over time. This can result in a heavier financial burden in the future. In event of death, the estate must repay the loan plus interest over a specific period.

Dr. Wayne Dwyer, one of my favourite teachers, said that “When you change the way you look at things, the things you look at change.” Marybeth looked at the Toronto resale market from a different angle. She concluded that many sellers are postponing their sale because of the fear of getting infected. This created an artificial shortage. Marybeth sold her home for a windfall. She self-isolated on a waterfront home in Nova Scotia. She bought her new home for a fraction and invested the difference in the depressed stock market.

One of the brightest gems uncovered by COVID-19 is that we are living in a great country. More than ever, many around the world would give up everything they have to be here. When the dust settles, immigration will surge, the economy will hum, and home prices will go up. We will have a window of opportunity to buy. Let’s not lose it.