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These lending rates create what is sometimes called a barbell, where borrowing costs for individuals are very far apart from borrowing costs for many businesses.
What is important is that these aren’t particularly risky businesses, and those that are lending to them have exceptional security on the loans. As a result, the historical loan losses on these business loans have been extremely low.
This brings us back to the question of what you can or should be doing with this access to cheap money.
In our view, if you can match up the cheap borrowing and invest it into secured lending that pays a high rate of return, you are getting close to the security that banks feel when they match GICs with mortgages.
Fortunately, there are now many options to invest with companies that have very strong risk and operational procedures to lend to businesses. These investments have generally had returns for investors in the 6.5 per cent to 8.5 per cent range on a steady basis. We have been using this as part of our investments for clients for about seven years. Even in 2020, the returns stayed very much in line with their historical returns.
This investment strategy will not be for everyone. There is some risk here, but meaningfully less than borrowing to invest in the stock market. In addition, only some people will have the ability to borrow funds.
One example of how this can potentially be used is to create a new monthly cash flow. In some respects it is like creating rental income without the bother of actually having a tenant.