Window closing’ on ultra-low mortgage rates

Tim Shufelt, Financial Post · Monday, Feb. 7, 2011

Amid the noise of volatile-but-improving economic indicators, mortgage rate hikes are likely to repeat like a chorus in the coming months.

Canadian banks are raising interest rates on mortgages, marking the beginning of a trend as they correlate with rising bond yields and expected monetary tightening.

That’s making a strong case for borrowers to lock into fixed rates before it’s too late, said Benjamin Tal, deputy chief economist with CIBC World Markets. “The window is closing.”

TD Canada Trust and CIBC both announced Monday hikes to their residential mortgage rates, the first increases since changes to the rules of borrowing were announced by the federal government last month. The other big banks where expected to follow the moves shortly.

Effective Feb. 8, the interest rate on the banks’ benchmark five-year closed fixed rate mortgage will increase 25 basis points to 5.44%. The country’s other major lenders are expected to soon follow suit.

Toronto mortgage broker Paula Roberts said rising borrowing costs will compel more of her clients to abandon ultra-low variable rates in favour of higher, fixed-rate mortgages.

That can be a tough decision for borrowers to accept higher payments, but not one that should strain a mortgagee’s finances, she said.

“If you can’t afford [your payments] ... that’s a problem,” Ms. Roberts said. “That’s why the government has changed the rules.”

In two stages over the past year the federal government announced changes to the conditions of mortgage lending — shortening the maximum amortization from 35 years to 30 years and requiring borrowers to qualify for a fixed-rate plan, even if they are opting for a variable rate.

Many who only qualify under the old rules, however, will try to secure mortgages before the shorter maximum amortization periods come into effect next month, Ms. Roberts said.

“There are going to be a lot of people that will enter into their agreements by March 18.”

Much of the momentum in mortgage rates can be attributed to a bond selloff and rising yields across the board. That effect is partly a reflection of building global inflationary pressures as well as a global economy that is proving more robust than expected.

“In my opinion, the bond market will not be the place to be over the next six months, and if that’s the case, you will see mortgage rates continue to rise,” Mr. Tal said.

In addition, anticipation of increases to the Bank of Canada’s benchmark lending rates is building, also contributing to rising yields, which puts pressure on fixed-income mortgages.

If there was any lingering doubt that the Bank will soon raise rates, last week’s jobs report erased them. The report showed Canada added four times more jobs than expected in January.

“[It] creates a fairly powerful story for the Bank of Canada, which is clearly concerned on the domestic front,” said Camilla Sutton, chief currency strategist at the Bank of Nova Scotia. “I think there’s a material change.”

So do investors. The probability that the central bank will boost its key policy rate by May, as measured by overnight index swaps, jumped to almost 75% after the jobs data. http://www.financialpost.com/news/Window+closing+ultra+mortgage+rates/4239243/story.html#ixzz1DMwQzyWP

lawlessbrown.com

Managing debt while rates grow

Terry McBride , For Canwest News Service SASKATOON -- Canadians have taken advantage of extremely low interest rates to overextend themselves. The Bank of Canada wants to try to prevent inflation by raising interest rates to slow the economy down. How will debtors manage?

Inflation vs. deflation

Actually, debtors generally prefer inflation (when prices go up) because that can make it easier to repay a debt, which is a fixed dollar amount owing. Loan payments become more affordable when wages keep up with inflation.

Debtors usually fear deflation (when prices go down) because it becomes more difficult to repay an obligation when the fixed number of dollars can buy more. Deflation is already a major concern these days in Europe where some governments are raising taxes and cutting back on spending to tackle mushrooming public debts. Businesses there may be forced to cut prices and workers’ wages to cope with the economic slowdown.

Debtors fear deflation. How can they handle debt payments after their wages are cut or they lose their jobs? Serious household debt management issues arise.

Mortgage term

If your mortgage is coming up for renewal, how do you choose the best mortgage term? If you have had a variable or floating rate of interest tied to the prime rate, should you take the safe route and lock in a fixed, usually considerably higher, interest rate for five years?

If your mortgage payments rise, then you will have to look at various ways to manage other debts.

Consolidate

One popular debt management strategy is to combine various loans into your mortgage or a line of credit. Consolidation can eliminate high-interest credit card debt. Free up some cash flow by reducing your interest costs.

Talk to a professional debt counsellor. Can you have a single monthly payment? You could continue to make the same level of payments on your consolidated loan as you did before consolidation. Aim to reduce your principal owing and cut interest costs.

Amortization

Knowing how amortization works will help you to understand how to properly manage your debts. Amortization is how long you are scheduled to repay an instalment loan.

If interest rates rise, consider stretching the repayment period on an instalment loan to reduce the size of your monthly payments. Making your payments smaller seems very attractive at first. However, by making payments over a longer time period you will eventually pay much more interest in the long run.

Debt snowball

Here is a strategy for cutting down your overall debt level:

Make a list of your debts. Add up how much you pay on each loan.

Pick the smallest debt to tackle first. Pay the minimum on all debts except for your target debt. Pay whatever is left on your target debt until it is paid off. Then, continue with the debt snowball strategy by choosing the next debt on the list as your target debt. Pay it off.

Borrow wisely

The next time you have to borrow, avoid buying something that drops in value. The only time you should buy something using debt is if it is something that will appreciate in value or generate additional cash flow for you.

As a general rule, if you are buying something with borrowed money, make sure that what you buy lasts longer than the debt. Don’t add to your debt burden by going on a vacation financed by credit cards.

Emergency fund

Do you have to borrow when you have an emergency? Instead you should build an emergency fund with cash held in reserve. You could use a Tax-Free Savings Account, the cash surrender value of a whole life policy or a Canada Savings Bond payroll savings plan, for example. Having cash available to pay for an emergency will give you greater financial security than an untapped line of credit.

Terry McBride is a member of Advocis (The Financial Advisors Association of Canada)

lawlessbrown.com

Unemployment Improving in Canada

Janet Whitman, Financial Post

Canada, which remains on much sounder economic footing than the United States, had a better-than-expected increase of 24,700 workers added to payrolls in May, with most of the gain in full-time and private-sector positions, Statistics Canada reported. Bay Street had been forecasting a 15,000 gain.

The U.S. rate isn't likely to head much lower this year or next because the expected U.S. economic growth of around 3% or 4% won't be enough to create sufficient jobs for the roughly 15 million Americans out of work and new entrants in the labour market.

Canada's strong jobs report, meanwhile, shows the Bank of Canada was on the right track by raising interest rates earlier this week despite the financial turmoil in Europe, said Benjamin Reitzes, an economist with BMO Capital Markets. "Canadian employment is now only 108,000 from the peak hit in October 2008, and is up 1.7% from a year ago, much better than the still-negative yearly change in the U.S.," he said.

The strong report indicates more interest-rate increases are coming, perhaps as soon as July, some analysts said. http://www.financialpost.com/Jobs+stall/3115343/story.html

lawlessbrown.com

Bank of Canada rate bump not necessarily a harbinger of hikes to come. Uncertainty over global economy might ease pressure for future increases.

On the same day the Bank of Canada bumped its key lending rate up, a major chartered bank edged a key mortgage rate down, moves that reflected the continuing uncertainty in world financial markets.

The Bank of Canada on Tuesday became the first G7 central bank to raise interest rates since July 2008, hiking its key overnight lending rate one-quarter of a percentage point to 0.5 per cent in a long-anticipated move aimed at keeping Canada's recovering economy from overheating.

However, with uncertainty over the global economy mounting due to turmoil in the European Union, the pressure for future short-term rate increases might be easing.

The turmoil has caused interest rates for longer-term bonds to fall, allowing the Bank of Montreal to trim its five-year discount mortgage rate one-tenth of a percentage point to 4.25 per cent.

Having short-term rates rising while long-term rates are falling, "is a very unique situation we haven't seen in a very long time," said Benjamin Tal, a senior economist with CIBC World Markets.

He said it was "a bold move by the Bank of Canada realizing there is a real risk it will have to [pull back interest rates] after this move."

Commenting on his decision, Bank of Canada governor Mark Carney said "any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," given the uncertainty around the global recovery.

Carney said the decision "still leaves considerable monetary stimulus in place, consistent with achieving the two-per-cent inflation target in light of the significant excess supply in Canada."

The decision came a day after Statistics Canada reported the domestic economy had its strongest quarterly performance in over a decade, as GDP expanded by 6.1 per cent in the three-month period ended March 31.

Tal said one of the reasons Canadian bond interest rates have fallen after increasing in April is because the market had priced in a more aggressive move by the Bank of Canada.

Tal added that it is becoming uncertain whether the central bank will need to continue raising rates at its next meeting in July.

"Even the Bank of Canada isn't convinced they will move again," Tal said.

Doug Porter, deputy chief economist for BMO Capital Markets, said Carney's statement "was unambiguously on the dovish side of expectations with the bank almost bending over backwards to indicate this is not necessarily the start of a relentless campaign to crank rates higher."

In the meantime, Tal said home buyers in the mortgage market also face a unique situation with first-time buyers getting a second opportunity to take advantage of relatively low fixed-term interest rates on longer-term loans, which are tied to the bond market.

Those who already have variable mortgages, which are tied to the bank's prime borrowing rate and influenced by the Bank of Canada's key rate, can expect higher loan payments.

"Ultimately, the [variable-rate] increases will not be significant," Tal predicted.

With variable mortgage rates one-quarter to half a percentage point below the major banks' prime rate of 2.25 per cent, Tuesday's rate change won't add a lot to most monthly mortgage payments.

"A quarter-point increase [does not have] a huge impact," Joanne Vickery, president of the Mortgage Brokers of B.C., said in an interview.

On a $250,000 mortgage amortized over 25 years, for instance, the bump would increase a borrower's mortgage payment by almost $30 to $1,058.

But in future, Vickery said, borrowers should pay more attention to rates and how increases could pinch their budgets.

The Canadian Association of Mortgage Professionals estimates three out of every 10 Canadian mortgage holders have opted for variable-rate loans, which are still a good deal given five-year fixed rates range from BMO's 4.25 per cent to 4.59 per cent.

However, Carolyn Heaney, BMO's area manager of business development in Metro Vancouver, said the bump in rates should be an incentive for borrowers to "stress test" their budgets to determine where their "sleep-at-night factor is, and how comfortable they are with changing interest rates."

depenner@vancouversun.com

Read more: http://www.vancouversun.com/sports/Bank+Canada+rate+bump+necessarily+harbinger+hikes+come/3100753/story.html#ixzz0pp7fmdWG

lawlessbrown.com

Beware the coming credit card hit on Canadian families

Neil Reynolds Globe and Mail

Published on Wednesday, May. 19, 2010 6:00AM EDT Last updated on Wednesday, May. 19, 2010 1:49PM EDT

MBNA Canada Bank mailed notices to credit card holders last week, notifying them that the country’s No. 1 issuer of MasterCard will be changing the way it calculates minimum monthly payments. Other card companies are doing the same, in accordance with new federal regulations aimed at greater transparency for consumers.

As an example, MBNA cited an account balance that would have required a minimum payment of $185 in the past; as of August, that required payment will rise to $307, an increase of 66 per cent. A higher payment would reduce interest costs, MBNA noted, adding that it would also “help you pay off your balance faster.”

We now have detected yet another coughing canary in the exemplary Canadian coal mine. Exploiting low interest rates, Canadian households have taken on record personal debt ($1.4-trillion) – more than doubling it in the past decade to now equaling more than $40,000 for every man, woman and child in the country. This is the highest household debt in 20 of the most advanced economies of the Western democracies. More ominously, however inevitably, the number of Canadian households filing for bankruptcy (or taking alternative emergency measures) has also set a record. By year’s end 2009, more than 150,000 families were economic wrecks (up by 30,000 families from year’s end 2008).

Household debt includes mortgages, bank loans and credit cards. On the country’s huge increase in mortgage debt, the relevant experts are divided: On one hand, homeowners are apparently comfortable with it; on the other hand, Bank of Canada Governor Mark Carney not so much. As always, time will tell.

Credit card debt is another matter altogether. The number of credit cards written off as bad loans – on an industry-wide basis – fell marginally in April (from 6.9 per cent to 6.8 per cent). The optimism generated by this modest good news was, as Report on Business’s Andrew Willis noted last week, a factor in the Royal Bank of Canada’s off-loading of $1.2-billion in credit card debt to presumably astute investors.

But according to Deloitte Canada, in an April report, the credit card industry has averted calamity by the skin of its teeth. The industry, the accounting company said, “has been transformed from one of the most profitable areas of lending to one of the least.”

The industry’s narrow escape, Deloitte said, means that things will have to change – from strategic revision of business practices and operating models – to exits, by some companies, from the business. Deloitte attributed the crisis to a “perfect storm” of causes: “record net losses driven by increased debt and rising consumer bankruptcies, [which have] occurred at a time of increased government regulation.”

Canadians hold 72 million credit cards and 37 million debit cards. Credit card debt stands at $72-billion. How are card holders doing in making their minimum monthly payment? From year’s end 2008 through year’s end 2009, the number of delinquent credit card holders (with payments in arrears by 90 days) increased by 50 per cent. These tardy card holders won’t all default, of course; but, assuming that MBNA’s higher-payments strategy extends through the industry, more of them certainly would. On the margin – and millions of Canadians live close to it – people who have trouble with a payment of $185 will have more trouble with a payment of $307.

It isn’t only consumers with accumulated credit card debt who need to take note of credit card companies’ move away from the traditional easy-money approach to unsecured lending. Mr. Carney might take note, too. Higher monthly credit card payments are the economic equivalent of a broker’s higher margin requirements. It is an economic tightening that puts a brake on economic transactions. From Mr. Carney’s perspective, it’s another stubborn signal of deflation, because it’s inherently deflationary to curtail lending.

Banks make money in two ways: by charging fees and by collecting interest. In its letter to card holders, MBNA notes that the raising of the minimum monthly payment would decrease the amount of interest it collects. The maneuver is also defensive; in effect, it shifts the risk from itself to its customers.

There’s more of this sort of thing to come in the next few months. In July, Ontario and British Columbia introduce a wide range of (HST) tax increases that must be paid, at point of purchase, from people’s disposable personal incomes. Other provinces are raising a range of other taxes. As the conservative think tank Fraser Institute noted last month, the average Canadian household already pays more in taxes than it pays for food, clothing and housing combined. Alas, the Canadian household – or, at least, the Canadian private sector, working-class household – is pretty much a spent force.

lawlessbrown.com

With Statistics Like these, Now is the time to Re-arrange your finances!!!

Studies are proving that many Canadians have taken on more debt than they may be able to handle.

With the increase in current housing prices and mortgage rates at almost historical lows, now is the perfect time for home owners to take advantage of the current economic environment and re-arrange their finances, BEFORE interest rates start to climb.

Lowering consumer debt will not only decrease the amount of interest being paid on credit cards and lines of credits, it will drastically reduce monthly obligations. This will put homeowners in a much more stable and solid financial position moving forward and be able to face the increases in interest rates that are headed our way.

Talk to Krista and Sherri, your Accredited Mortgage Professionals, and see the benefits of using the equity in your home to save you money each month and be able to take the interest rate increases in stride.

Krista Lawless, AMP

lawlessbrown.com

Even recession didn't slow down Canadian's spending, report finds

By Julian Beltrame, The Canadian Press

OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians' appetite for spending money they don't have.

A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.

That's $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.

"This report is another indication of Canadians' readiness to consume today and pay later," says association president Anthony Ariganello.

"The concern is do they understand the full cost of paying later?"

The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.

Most Canadians don't yet share that concern. The accountants' survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.

But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.

The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.

The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.

The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.

The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.

Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.

BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada's decision to slash rates to historic lows during the recession.

"That's why we did not experience a great recession," he noted. "That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem."

But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.

Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike.