Tuesday, September 8, 2009

lowered my cost of borrowing

As I've previously mentioned, last year I began borrowing money inside a line of credit and investing the funds in dividend paying stocks as the market took a nosedive. I deployed the majority of the money between October 6, 2008 and February 26, 2009. I should have instead invested all of the money in early March, 2009, but I'm just not that good...

The only piece of this strategy that continued to bother me was the fact that I was paying an interest rate of prime + 3% on an unsecured line of credit from a major bank. Even though I am able to claim this interest on my taxes, I was still unhappy with this rate. After attempting to negotiate a lower rate with a few banks on an unsecured line of credit, I decided to go instead with a home equity line of credit secured against our home.

I've just completed the process of opening a home equity line of credit with President's Choice Financial (CIBC Bank). The process was fairly easy and I was quite pleased with PC's price of $150 to open this loan. This option compared very favourably to the fees asked for by two other banks. On the eventual occasion that I close out this loan with PC I will be required to pay a $225 closing fee. The rate on this loan is prime + 1%, currently 3.25%.

Overall this dramatically decreases my cost of borrowing and I will make up the total fees of $375 in mere months. Writing off this interest at 3.25% makes this pretty close to free money.

7 comments:

Anonymous said...

what if the market crashes as it usually does in september? are you willing to risk both paying interest on borrowed money and losing that money??

I've moved to 80% cash effective yesterday at 3pm.

MG (moneygardener) said...

As with any strategy there are risks involved. If the market crashed in September, I would probably reasses the valuation of stocks and do some selective buying. The month on the calendar means nothing though.

I am in the camp that believes that we've seen the bottom in March.

ahhbeebee said...

Dont' worry, I was buying a little early too (darned deer in headlights syndrome after a 50% market crash)

- but I'm still confident that Oct-Feb buying was still a good opportunity. With earnings starting to recover, my calculations put some of those purchases back when P/E's were in the 9-12 range for those strong dividend payers/growers that you and I both have been adding to like WMT, PG, JNJ, MCD, CAD banks etc.

Going forward, I'm still waiting on this 10% correction that hasn't seemed to materialize.

ahhbeebee said...

Oh yeah,

Great move on reducing the loan interest rate!

Dividend Growth Investor said...

So you are essentially "betting the house" now , aren't you ;-)

Bobby SoAwesome said...

Did you think of Very Quickly selling off your portfolio, using the funds to payoff your mortgage, Increaseing your HELOC to offset the paydown of the mortgage and then borrowing back the paydoown to repurchase your portfolio? That way part or all of your mortgage becomes deductible and your portfolio doesn't change. I don't know if this was discussed previous or not and certain costs come into play but.....

MG (moneygardener) said...

Hi Bobby,

I thought about it but I wouldn't want to pay the associated trading fees, taxes, etc.