This Covid-19 global pandemic has spoiled a lot of people’s long term goals. While I was ready to go on a semi-retirement stint and do more traveling yet remain working part time or in a casual position – the world has come to a standstill.
Prior to this pandemic, we decided to be tenants as we pursued our semi-retirement plans. However, we all know what happened – so many things have been imposed. In addition, travel has been restricted and even gathering with families and friends was limited to essential visits only.
So now, what? We could no longer do what we have been planning for a while. As front liners, the way we see it – this virus is not going to go away for quite some time. Additionally, It became apparent to us that this pandemic might linger for a year or two and no end of sight soon.
Although our plans have been put on hold. We don’t want to be far from our children who might have their own family in the future.
We are done with living in the city, with all the craziness of traffic gridlock, overcrowding, and the high cost of living – where else? Metro Vancouver. Having lived in this beautiful province of British Columbia – it’s not difficult to decide where our next destination is – Vancouver Island!
Hence, we decided to be homeowners again.
This time it’s different as we have learned our lessons from our previous experience of buying our first home in Canada.
We have two options of doing this!
1)Taking our invested money to use as a down deposit for the property
2) or using leverage – other people’s money (OPM) to use as deposit.
Over the years, we have learned a lot from other financial savvy people that in order to increase their wealth they are not using their hard earned money, rather by borrowing from families, friends, banks, and from other types of lenders in acquiring a property or starting a business.
Low Interest Environment
And we thought, what a perfect time to borrow when the interest rates are at an all time low.
Furthermore, with borrowing we could have few options too. We could either take a loan or a line of credit with a lower interest to use as a down deposit.
However, what if we can even go further and borrow money at 0% interest.
You probably may ask, Is it even remotely possible to do that? The positive answer is Yes.
In my opinion, this strategy is only possible if these factors co-exists.
- Have a stable job with your employer for a solid number of years
- Outstanding track record of excellent credit history
- A very good to excellent credit score
- A secured tucked away emergency fund, savings, and or investments
How does it work?
The strategy is borrowing money from a credit card company. Back in the days, while living in England when 0% credit cards were abundant, this was the strategy that we used to fund our frequent travel vacations abroad. This term was called stoozing, a British slang named after the user Stooz in a discussion forum of the Motley Fool financial website who advocated the strategy of borrowing and saving methods.
Essentially, we applied for a 0% balance transfer card and requested the credit limit be transferred to our checking or savings account. Once credited to our account, we can use the funds for whatever purpose we want – either paying debts (most common) or into investing.
However, not too many of these credit cards are available these days. In fact, MBNA is the only credit card company that offers 0% balance transfers as far as I am aware. The 0% BT period offers is around 10 -15 months with a one time BT fee. Obviously, the longer the better is more beneficial. Approval with this card might be difficult, one should have a stellar credit score in order to obtain one.
Luckily, apart from having stable jobs, we always maintain excellent credit scores over 800 despite already owned several credit cards in our names. In addition, timing is also important when applying for the card. We made sure that we applied for the card when we were ready to purchase our home.
As soon as we knew the location and where we were going to settle, we applied for the 0% BT credit card. Luckily, as we have expected, we were approved almost identical credit limits enough to put the minimum down deposit of 5%.
Next step, we then shopped around and contacted a few mortgage brokers for the best rates. Finally, around the same time last year we got the pre-approval rate of 1.36%, the best variable rate at that time.
Why choose a variable rate?
As a consequence to this global pandemic and the slowing of many economies we believe that rates will remain low for quite some time.
In fact, many countries and governments around the world have promised to keep the interest low indefinitely. Additionally, by our own experience, we always choose variable rate rather than a fixed rate.
I am sure many readers will ask, why only 5% not 20% or bigger as a down deposit?
Isn’t that too risky?
What if the interest rates suddenly rise?
Are we able to afford the payments?
Overall, these are questions and variables were not taken lightly. There is a huge amount of risk involved in this undertaking. This strategy will only bode well to the very disciplined individuals.
Our response to those questions and risks
Majority of homeowners will simply choose a fixed rate mortgage for a few years for safety of eventual rate increases and invest if there is still left after paying all bills.
However, we made a conscious decision on our part, to only make a minimum deposit, choosing the lowest rate possible, and only making monthly regular payments with No plans of making extra payments.
As you can see, it doesn’t make sense to us to put your hard earned money in a hard asset which is your home which is Illiquid.
Instead, we divert much of our income and invest in the stock market that produces tangible passive income such as dividend stocks.
Taking advantage of the low interest environment – we make it automatic – paying ourselves first once our paycheck goes into our free hybrid checking accounts then funds diverted to our brokerage accounts.
We are putting away close to 50% of our current income directly to our investments. Our goal is to increase this rate by cutting some of our recurring monthly expenses.
It is our assumption, although not guaranteed, that the value of our home will continue to rise steadily in the future. Subsequently, with that assumption, it means we will still be ahead and able to make profits by the time we want to sell our home through capital appreciation considering we only put a small down deposit and made minimum monthly payments.
At the same time, our passive income from our TFSA dividend investing for example and combination of our RRSP and non-registered accounts will continue to grow and might even reach a point that it’s even bigger than our monthly mortgage payments and other expenses.
Defined benefit pension plan from work and other government retirement benefits will be the icing on the cake. However, this is something that we don’t rely on heavily as these are future benefits are beyond our control.
Back to the 0% BT credit card
Simultaneously, we need to make sure we satisfy our obligation to make monthly minimum payments and pay it off prior to the promo period end date. Again, this takes a lot of discipline and reminders as to the exact dates when to pay off the credit card. Lastly, we plan to pay off those 0% credit cards usually 2-3 weeks before the promotional period ends.
Several options of paying the 0% BT credit card
- Transferring to another 0% credit card
- Using HELOC to pay for the credit card
- Borrowing from a LOC with the lowest interest
- Selling some of our investments from our margin or non-registered accounts
As you can see, this strategy can be repeated over and over again. However, I have to reiterate that this strategy involves an extremely high degree of risks. Everything we shared is our personal experience and nothing should be considered as advice.
Note: For transparency I have started this blog with my commitment to post our TFSA dividend income only. We don’t have any intention to post the total value of our portfolio or personal net worth updates. Thank you for your understanding.
My Final Thoughts
In essence, using this strategy of leveraging or using OPM is one great way of increasing your assets and personal net worth which can lead you achieving FI sooner. Moreover, able to execute this strategy, we were back to owning our home thereby improving our personal net worth without harvesting our hard earned savings and investments as deposit to our home.
Finally, this was only possible as I am very fortunate to have married someone who is not only a hard working and frugal individual yet we share a common goal of achieving financial freedom together.
DISCLAIMER: Everything I have shared in my blog is wholly related to my personal experience. It is for entertainment and educational purposes only and should not be construed as advice.
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Recently got my first MBNA credit card with 0% interest for almost a year. Time to use the amount I was given to my advantage.
I’m glad you are taking advantage of those 0% BT credit cards. That’s great that you have it almost 12 months interest free. Please do come back and share what you end up using it for.
Are you sure it’s 0 percent? I have a MBNA card and see the offer, and I also see another on the main page of their site. It’s advertised as zero but a 3% fee applies. Which means it’s a loan for 3% (assuming 12 month period).
Guessing you are moving to the island?
Thanks for visiting my site. Not many of this MBNA credit cards in existence. You are correct there is 3% one time fee when you request a BT and just pay the minimum for the rest of the months to take advantage of the 0% months. Gone are the days when there is NO BT fee at all. You may find this specific card here: https://www.lakeheadu.ca/alumni/benefits/mbna
As you know, I’m a huge fan of leverage! I’ve considered borrowing with 0% CCs to invest, but wonder how you get around two issues:
I’d love to learn more about how you tackle these two issues!
Hi Chrissy. These days it’s becoming harder to get approved with higher credit limits. They are becoming stringent with their approval process and noticed that limits are not as high as it used to be. One thing that I’ve noticed is that if one has proven solid job and income with stellar credit score, and credit utilization of 30% or less, the likelihood of getting approved still high. The highest credit limit we have in the past is around $25K each. Unfortunately, there is not much of these credit cards around. What we normally do is just pay these cards… Read more »
Thanks for this perspective on getting back into home ownership while using as little cash as possible!
In the year since your blog post, it has been quite the year in the markets. Are you planning on trying to ride-out the higher interest rates while keeping a variable rate mortgage? Has it taken a bit of money out of what you have been able to invest?
Thanks for dropping by and leaving a comment and sorry for the delayed response. I do believe that if inflation will still not be curbed interest will to continue to rise slightly. In our humble assessment, we are confident and comfortable to ride it out and continue to be on a variable rate mortgage. It’s definitely a strategy not for everybody and would not even recommend to anyone. It is a deeply thought out process when considering to stay on a variable rate mortgage (risk tolerant). Moreover, we are fortunate to have such stable jobs to implement this strategy and… Read more »