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 Mortgaging property when rates are low is well-known advice. But
unprecedented transparency by the central bank about its goals and
rate expectations means that advisers are in a unique position to
plan borrowing strategies, said Chris Bilton, a Chicago-based
adviser for Bank of America Corp's Merrill Lynch unit.
“We can plan a lot more precisely,” Bilton said, “We can map out
what we think we can earn on investments, versus what we think
long-term debt will cost. It’s the first time in history that we’ve
been able to do that,” Bilton said.
Central bank policymakers have been saying they expect to tighten in
December, after holding the federal funds rate at the current 0 to
.25 percent range. They also showed that most expect the funds rate
to top 3 percent by 2018.
Meanwhile, 30-year fixed mortgage rates are hovering just under 4
percent, according to data from Bankrate.com.
Not surprisingly, clients want to know if now is the time to move,
refinance or buy a vacation home, Bilton said.
“Without a doubt, the answer is yes,” Bilton said.
In fact, now is "as good a time as we’re going to see,” said, Joe
Heider, founder of Cirrus Wealth Management in Cleveland, agreed.
What's more, not all clients must stick to traditional mortgages,
Heider said. The highest net worth clients can also use shorter-term
lines of credit against their securities, at rates of around 1.5
percent. On assets that yield at least 3 percent after tax, it's a
good deal, Heider said.
One of Heider’s clients used such a line of credit as a way to
refinance existing debt on a commercial building. When the Fed
ultimately tightens rates, Heider and his client will reevaluate.
“If interest rates cross over a line where he can do better with
other investments, he’ll just write a check,” Heider said.
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Still, it is important for advisers to remind clients that they are
not professional real estate investors. And there is always the risk
that higher interest rates, whenever they appear, will cause home
prices to slip, said Mike Piershale, president of Piershale
Financial Group in Crystal Lake, Illinois.
“We’re cautioning against buying properties right now unless you’re
planning on staying in them,” he said.
Still, advisers say most clients are wary enough following the
bubble and crisis, and for well thought out plans, it is time to
act.
A client of Bilton’s, at Merrill Lynch, had enough cash to outright
buy a second home he had long been eyeing in Sarasota, Florida.
Instead, Bilton helped him get a 10-year mortgage at 2.75 percent.
After a tax deduction for mortgage interest, the client pays just
1.5 percent on the debt, and reaps a 3 percent yield on other
investments.
The move was “a no-brainer,” Bilton said. “That’s what we call
positive interest rate arbitrage.”
(Reporting by Hilary Johnson; Editing by Suzanne Barlyn and Cynthia
Osterman)
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