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Posted Interest rates

Bank of Canada action not always prudent or correct…

Have to share this article giving us some history on the accuracy of the Bank of Canada (BOC)  interest rate forecasts…   This should get you thinking a little the next time you hear the  BOC forecasts…. Take a look at this Historical Rates chart.. look at the Bank Prime section…   You will notice some trends of rates hikes followed by rate drops…

We aren’t saying BOC rates will fall anytime soon… it’s clear the rate will go up…. but there is no straight line increase if you look back in history… Increases are followed by decreases…

-1992.. the BOC erred and raised rates thinking the economy was strong but they quickly retreated and reversed those increases after realizing it was too much, too soon.

-1995…the Quebec referendum year… remember that?  I do.. I bought a house that year… and interest rates went up 1.00% overnight after fears of a Quebec ‘YES’ vote was more than possible… but then rates dropped like a rock and remained low for several years…

-2000….another recession… the dot.com, dot.bomb error of hi-tech stock greed…  rates had climbed in 1998 and 1999 but dropped in 2001 and remained low once again…

-2008…the U.S. mortgage crisis… the worst Global recession since the Great Depression of the ’30s…. we saw BOC drop the rate to a modern-day record low…Bank Prime was 2.25%…

-2010…the BOC kept it’s promise to raise rates and increased the rate by 0.75% over a 3 month span to 3.00%….

-2011…. ?????  the BOC is expected to raise rates by as much as 1.00% this year, and another 1.50% next year, according to the RBC Economist…. Did the BOC raise rates too quickly?  Can our economy absorb these increases?   Questions that won’t be answered for a while…

It doesn’t mean you have to sit and do nothing

But this doesn’t mean you have to stand by and be a spectator.   By keeping informed with historical trends and understanding your own personal situation, you can be in control…. Understand where you fit in… Is Fixed rate better for you now?  Does Variable Rate still make sense for you?   Can you handle the potential increases that are coming?    A good Mortgage Broker can help guide you to the right answer… Remember, it’s your mortgage, your payment…your decision.

Posted Interest rates

Fixed rates are heading up

Fixed mortgage rates are going up.   Already, TD Canada Trust has announced they are hiking rates by 0.25%.  Their new ‘best advertised rate’ is 4.39%.   They are also increasing their 5 year posted rate by 0.25% to 5.44%.  This posted rate is important if you are buying with less 20% down.   All Banks must qualify borrowers with the posted 5 year fixed rate, or the prescribed rate.

The bond market has climbed steadily over the past few weeks… 5 year Canadian Bond yield is at 2.74% today.  That’s an 8 month high.   The last time the bond was this high, the best 5 year fixed rate was 4.29%.

If you’re thinking of buying or refinancing, contact your mortgage broker and get a rate held.   Most Lenders offer a 120 day rate hold…. You can still get a 5 year fixed rate mortgage for under 4.00%.

On the bright side, these rate increases are a direct result of positive economic data that’s been coming out of Canada.  So although we don’t want to pay higher rates, we don’t want to have a weak economy either.

Posted Case study

Listen to the Professor about how to save money.

Professor Moshe Milevsky is regarded as one of Canada’s leading Financial Experts… He’s written several books on building and preserving your wealth.  He’s also done several studies on debt and mortgages.   (make sure to visit his site here)

One of my favorites, and one of his best case studies, called “Why these eggs belong in one basket”, was about a strange phenomenon that seemed unique to Canadians.   We seem to take the rule of diversification and apply it to our debts.   We would rather have a mortgage, a credit card, a car loan, a line of credit, etc…when we should really be looking at consolidating these debts into the lowest possible interest rate.

He concluded that a typical family with $95,000 in total debts, with $2,700 in the bank, is losing about $1,000 per year by diversifying their debts instead of consolidating.   Now apply that to your own situation…. maybe your debts total $300,000 or more, how much are you losing per year?  $3,000, $4,000 per year or more?

I have my own opinion on why, we Canadians, do this… it must have something to do with our being so conservative….  Our parents taught us to pay off our mortgage first… get rid of that mortgage…. This is good advice… but somehow we thought it was okay to buy that car with a loan or a lease.. after all, everyone finances their car, right?   And then there’s the Home Shows on TV… ah yes… We must have the latest in home decor…etc.. you get the picture…Symptoms of the ‘must have now’ generation (a subject for another day).

The Federal Govt thinks Personal Debt levels will go down if we change Mortgage Rules….  By making it harder to get a mortgage, we will slow personal spending habits… My advice is to listen to the Professor…  Take your debt, roll it into your mortgage, pay less interest and save money… It’s really that simple…

Should we encourage home ownership or renting?

I found this article about the effects of making it harder to buy a house….. Here’s one of the statements that got me thinking..  “Rather than buy a home for half a million, many are moving out of the community to rent, or living rent free with their parents and buying all this junk.” I wonder how true this is.   I must admit, I know several people that are living at home in their 30’s, 40’s and even longer…. They don’t seem motivated to buy a house.

Final message is that Debt Consolidation is not a dirty word.   It’s good money management.

Posted 2 Comments on Personal debt level up…uhh, wait.. maybe we made a mistake?! Consumer Debt

Personal debt level up…uhh, wait.. maybe we made a mistake?!

As you know, I have been very critical about the data that was being put out over the past few months regarding Canada’s personal debt levels.. We were being bombarded with reports and comments about our spending habits… I found it hard to believe that we could go from conservative nation to a casino nation in just a few years…

Sure, there is more debt…. Outstanding mortgage balances topped $1trillion for the first time… but we seemed to be growing at a moderate pace, year over year.. We didn’t have the 20% to 30% increases in real estate prices that we saw in 1987-89, or like our neighbors in the U.S. over the past decade.  Meaning there was less chance of a housing bubble or crash.

And what about our assets….?  It was hard to find any report about our net worth or assets…  There was one report from Ben Tal, Senior Economist CIBC, that didn’t get much notice but we reported it here on December 3rd…  here are some of those stats…

-there are 12.5million households in Canada…31% rent, 69% own..

-of the 69% that own, 39.9% have a mortgage and 28.9% have no mortgage.

-69% of homeowners with a mortgage have more than 20% equity in their homes… only 30% have less than 20% equity in their homes.

click here for the full story..

And now for the real stats

Personal debt to disposable income ratio has been reported at 148%… This figure has been recycled more than that gift bag from the wine store you received at Christmas…. and just like that gift bag that gets passed around from friend to friend, it comes with a different bottle… or in this case, different figures and opinions.

Let see how you like this vintage….   Some new reports just came out that should ease our concern about our personal debt levels and average net worth.  “Average household net worth has risen to an impressive six times the size of disposable income, up from an average of five times in the 1990s.”  That’s a quote from BMO’s Senior Economist, Sal Guatieri…  read more here.

What’s this?  You mean Canadians are actually investing their money and not spending it frivolously like the Federal Govt has been telling us for the past several months?

It gets better…

Here’s a little more info from CIBC Bank..   Those figures had to do with the personal tax refunds we were getting last year because of the stimulus packages…. “Household debt in the third quarter grew at the slowest pace in nine years, while in the last month for which there is data — October 2010 — it was the softest in 15 years.” read more here.

That’s right, WE ARE SPENDING LESS AND OUR ASSETS ARE GROWING FASTER THAN IN THE 1990’s. … But how can this be?  The Federal Govt has been telling us that our personal debt levels are at dangerous levels…  and they had to change mortgage rules to slow our spending habits….. Any of this make sense to you?

Here’s an article from Ellen Roseman from The Star that says Canada’s Stock Market has outperformed the U.S. markets for the past 7 years… and we are poised to outperform them for the next 10 years….

Feel good about yourself Canada….. Keep investing… keep borrowing and spending wisely….

Posted 2 Comments on January credit card offers, new mortgage rules and Canadians buying U.S. real estate… Consumer Debt

January credit card offers, new mortgage rules and Canadians buying U.S. real estate…

There’s been lots of reaction to the latest round of Mortgage rule changes… it’s been just over a week since the changes were announced and I’ve had some time to digest these changes but something just isn’t making sense.

At the same time, my December credit card bills have started to come in…..and because it’s January, I’m also getting those preapproved credit card offers…. I can even skip a payment with some of my credit cards… Isn’t that convenient?

This made me wonder….I decided to ask some simple questions like, “who will be affected?”… and “who will benefit?”.    Here’s what I have come up with…

First, here’s what a few Experts think…

Jim Murhpy, President of Canadian Association of Accredited Mortgage Professionals, says ‘Debt Fears are overblown’…. and here are the stats to back it up.   One stat that really stood out for me was that 79% of Canadians are in a 5 year fixed rate mortgage… that means 79% of Canadians are not at risk of interest rate hikes…

(as an aside, I still like Variable rate mortgages with their low interest rates and the historical data that clearly shows Variable outperforming Fixed rate….but if the govt wants us to be ‘safe and secure’ in our mortgage, then this stat should make the govt feel more comfortable)….

On January 10th, 2011, Bank of Canada’s own Deputy Governor, Agatha Cote, said that debt growth in Canada was slowing… So hold on here….On the one hand, we are spending like kids in a candy shop.. but on the other hand, our spending has slowed….  Mixed message?  … So what’s really going on?

I’m going to change the subject for a minute…. but read on as you will see this is all related….

Canadians are buying U.S. real estate like never before

There was another great article last week that showed Canadians are the largest foreign buyers of real estate in the U.S. accounting for 23% of all purchases? WOW!  And in border towns like Ellicottville, New York, a local real estate broker said Canadians accounted for 50% of sales….   read more here.

These stats and buying patterns are showing me something…  Our mortgage arrears are below 1.00%… this is an unbelievably low number.. Click here to see what our U.S. neighbors are saying…..   Hmmm, maybe we are borrowing wisely?  Maybe we are borrowing to invest?  Isn’t this a good way to spend our money?

If the govt wants to slow personal debt levels, then why not impose qualifying rules on borrowing unsecured lines of credits, credit cards and loans?   After all, mortgage balances are around $1trillion… but Credit card purchases totaled $260billion...!   Remember this number.

Who is really affected by the new Mortgage Rules?

Simply put, there are 3 new Mortgage rule changes:

1- Amortization maximum is 30 years, down from 35 years and down from 40 years in 2008.    2- Refinances will be reduced to 85% loan to value, down from 90% and down from 95% just 2 years ago.   3- Secured lines of Credit will no longer be insured, meaning the maximum is 80% loan to value.

1- 30 year Amortization.… First time home buyers, Self-employed, contract employees are just some of the people that will be affected.. More Canadians are becoming self-employed or are on contract employment… This group of individuals doesn’t get a steady pay cheque… I would always recommend that this group take the longest amortization possible….Not to have a mortgage forever, but to ensure they have options and flexibility during times of uncertain income…  I would also recommend they set their payments based on a 25 year amortization or shorter… The longer amortization just means you could always reduce your payment to the lowest possible amount if and when needed.

This change will also make it a little harder for some Canadians to qualify for a mortgage… If you think this is good you need to remember last year, the government changed the rules that made it mandatory for all mortgages with less than 20% down to qualify at the Bank POSTED 5 year fixed rate (if you were considering a shorter term or a Variable Rate mortgage).  Many Banks are using this policy even if you have more than 20% down payment.   In effect, many of us are being forced into a 5 year fixed rate mortgage…. and which product do banks make the most profit on?   You guessed it… 5 year fixed rate mortgages…. read here for a little more insight.

Rental property Investors will also be affected.  Let’s face it, company pension plans are a thing of the past for most of us… (sometimes I wish I had a government job)…  So what’s someone without a company pension supposed to do?  RRSP you say?  Well, if your RRSP is anything like mine, then you are better off going to the racetrack or Las Vegas ….  At least you’ll have a good time spending it.   Real estate has been a proven winner over the last 10, 20, 40, 100, 300 years and probably longer….  The rents are usually indexed with cost of living and over time, the mortgage is eliminated giving you income and an appreciating asset.  Last year, the govt got out of lending on rental properties with less than 20% down…   It’s now a little harder to buy that investment property…

2- Refinances to 85% loan to value… Just one year ago, we were able to refinance our homes up to 95%… This options was not used by many…  Then it was reduced to 90%… now it’s 85%…   This won’t affect many of us but it will affect some..   Most people refinancing up to 85% or 90% were doing so to consolidate higher interest debt or to cover some emergency expense.   How is this helping to lower our personal debt levels?     This move will just force us to carry and borrow with those higher interest rate products… (are seeing a pattern here?)

3- Secured lines of Credit or Home Equity Lines of Credit (Heloc) are no longer available over 80%… This change really doesn’t affect many of us as most lenders stopped offering this product long ago and even when it was being offered, the costs were prohibitive.  This is a non-event.

Who will benefit from these new Mortgage rules?

So who really benefits from making it harder to qualify for a mortgage?   The answer is simple… Canadians will be forced to carry more debt on their credit cards, unsecured lines of credit and other high interest rate products… There are NO rule changes or policies in place for these products…  Don’t forget, credit card purchases totaled around $260billion last year…. In case you’re wondering, the total outstanding mortgage balances in Canada is around $1trillion.

The new rules won’t slow the credit seeker from getting another credit card and buying that new surround sound stero or hot tub or new car, etc..

So why did the government choose to make even further changes to mortgage rules?  The answers are obvious to me but I will let you decide.