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 jams, 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 to relocate next.
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!
Taking our invested money to use as a down deposit for the property 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 improve 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.
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 good 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. 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 of 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:
It is 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 direct much of our income and invest in the stock market that produces tangible passive income such as dividend stocks. Essentially, it is similar to choosing a fixed mortgage at a higher rate yet paying the minimum and investing the difference. Taking advantage of that benefit – 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 direct 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, 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 only.
At the same time, our passive income from your dividend growth stocks will continue to grow and might even reach a point that it’s even bigger than our monthly mortgage payments and other expenses.
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 before the promo 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 a higher degree of risks. Everything we shared is our personal experience and nothing should be considered as advice.
My Final Thoughts
In essence, using this strategy of leveraging or using OPM is one great way of increasing your assets and wealth. Assuredly, we were back to owning our home with No money down thereby improving our personal net worth without harvesting our hard earned life savings 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.