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Steve Ladurantaye and Barrie McKenna
Toronto and Ottawa — From Monday’s Globe and Mail Published on Monday, Sep. 13, 2010 3:00AM EDT Last updated on Monday, Sep. 13, 2010 10:17AM EDT

Bloated debts and rising interest rates threaten to force a growing number of families to cut back and prompt Ottawa to intervene again to cool down the mortgage market.
Canadians have spent the past year rushing into a housing market fuelled by low mortgage rates, despite prices many could not afford if rates were to rise to more historically normal levels. About 375,000 homeowners are already being forced to cut spending in other areas, despite ultra low rates, the Canadian Association of Mortgage Professionals said in a recent report. A further 475,000 would find themselves in the same position if rates were to climb to 5.25 per cent.
The rebound in the housing market has been key to Canada’s recovery from the recession. But it has left some facing a toxic combination of hefty debts and rising interest rates as the Bank of Canada pulls back from the emergency low rates used to juice the economy back to life.
The Organization for Economic Co-operation and Development warned in an annual review of the Canadian economy that record high debt levels have left many vulnerable “to any future adverse shocks.”
In the report being released today, the OECD said more measures could be taken by the federal government to keep marginal buyers out, suggesting an “overpriced” housing market needs to cool off before allowing more people to plunge in. Some 7.5 per cent of Canadian households could be “financially vulnerable” by mid-2012 if borrowing keeps up at the same pace and interest rates rise as expected, the report said. Economists have warned that while Canadians aren’t likely to default on their mortgages, they are likely to stop spending in other key areas, which would put a strain on the economy.

Canada isn’t at risk of a U.S.-style real estate meltdown, OECD senior economist Peter Jarrett pointed out. But he said “there’s somewhat of an excess” in the market that must be worked off.
The Paris-based OECD, a club of wealthy nations that includes Canada and 32 other economies, suggested Ottawa could require home buyers to put up bigger down payments if they want their mortgages federally insured. The government could also consider forcing banks to disclose the “sensitivity” of their mortgage revenues to rate hikes.
The organization said Canadians have been taking advantage of low interest rates to pay down their large mortgages, but “this is bound to change” as the Bank of Canada ratchets up rates and the economy begins to normalize. The bank has already raised rates three times this year.

“The fact is we’re three years in to the global financial crisis and its dynamics still dominate the economic outlook.” – BoC chief, Mark Carney

Rate-uncertainty The question everyone wants to know is: How long will that be true? The answer, which is as ambiguous as ever, has a direct bearing on the mortgage rates.

As always, we can count on the “professional predictors” to have an opinion. Here’s a sampling of what they’re saying now, following a week that brought the third consecutive BoC rate increase and an anemic employment report.

The economy will have to worsen further “to prompt the central bank to stop raising rates.” – BMO Capital Markets, deputy chief economist, Douglas Porter (Ottawa Citizen)

“…The (Bank of Canada’s) language suggests the bank may pause longer than merely the next meeting or two.” – BNY Mellon strategist, Michael Woolfolk (Global)

“In our opinion, the odds favour the Bank of Canada pausing for some time…TD Economics does not anticipate another tightening before March of next year.” – TD Chief economist, Craig Alexander (CBC)

“…The bank (of Canada) doesn’t know what it is going to do.” – CIBC World Markets Chief Economist, Avery Shenfeld (Vancouver Sun)

“…Rates are low and likely to rise at only a gradual pace in the next 18 months…” – TD Chief economist, Craig Alexander (Globe & Mail)

Do you get the sense that no one really knows where rates will be 12 months from now? If so, you’re right.

But that matters less than one might think. TD’s Craig Alexander told the Globe’s Rob Carrick this week: “Rates are remarkably low by historical standards. People get so hung up on the direction of interest rates. The level matters.” Translation: Today’s 3.59%-3.79% five-year fixed rates are manna from heaven. So are 2.90% three-year fixed rates and 2.30% variable rates. Rates are so good in general that most people don’t need to drive themselves to insanity while choosing between fixed or variable rates. As long as you don’t borrow over your head, your finances won’t be decimated by making the wrong choice.

It could have gone either way but Mark Carney and co. felt Canada’s economy was hot enough to warrant another tightening.

The Bank of Canada has therefore raised its overnight rate target to 1%, from just 0.25% three months ago.
Here’s the gist of the Bank’s written statement today:

* “…Consumption growth is expected to remain solid and business investment to rise strongly.”
* “The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected…”
* “…Financial conditions in Canada have tightened modestly but remain exceptionally stimulative.”
* “Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”
As a result of today’s increase, prime rate will likely climb to 3.00% this week. It would be the first time prime has seen 3% since February 2009.
If you’ve got a variable payment mortgage, this hike will add about $13 to your monthly payment, for every $100,000 you owe.*

The next BoC interest rate meeting is October 19.

“ Every morning in Africa a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. It doesn’t matter whether you are a lion or a gazelle – when the sun comes up,
you’d better be running. ”

The Bank of Canada may have no choice but to put interest rate hikes on hold after September, states a CIBC World Markets Inc report.
This would be all due to continuing weakness of the U.S. economy as key indicators are pointing to growth that will be slower than anticipated by monetary policy makers.

“North America’s story is again darkening,” says CIBC’s Chief Economist Avery Shenfeld in the latest Global Positioning Strategy report. “We were looking for a material second-half slowdown for the U.S. but as it turns out, it’s already happened. Forget about any rates hikes from the U.S. Federal Reserve until sometime in 2012 at the earliest.”
Although Canada is still leading the recovery charge, it “cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold,” says Shenfeld.
Shenfeld doubts that the Bank of Canada “has been shocked enough to forestall a rate hike in September” but his forecast that Canadian growth in Q2 and Q3 will fall below the BoC’s outlook will likely warrant a rethinking in the October Monetary Policy Report and in the months to follow.

As a result of the dampened external growth outlook, Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than 2% next year as the U.S. Federal Reserve stays on hold.

Why do so many products, services and brands grapple with such a very basic concept: people pay for value. But, it’s their perceived value and not the value you assign to it.
Newspapers aren’t dying. People are just buying them less and less because they’re not getting the same amount of value out of them as the used to. Same with in-home phone lines. Most people feel that they can get away with just having a mobile number. It’s like this with movies as well. Movies in the theatre now play on pay-per-view or are available on Blu-ray only a short while after their theatrical debut. Most homes now have big screens (and big sound), and so the experience of going to the theatre has been diminished by many. Nobody cares about owning a physical CD anymore, when you can get a high quality version of most music for your iPod (or whatever).
More media and more technology means more choices. In a world of more choices, the former 800-pound gorillas of their chosen industries now have to figure out how they are going to deliver real value. The kind of value that people are willing to pay for.
What have we really learned about value in the past few years?

* People will pay for an individual song (and maybe an album), but they would like the choice.
* People will pay for great writing – whether it’s in a magazine, newspaper, book or online. But, it has to be great (and not just your perception of great).
* People will pay to see a movie – they just might not go to the theatre or to rent it from your physical store any more.
* People will pay to be entertained.
* People will pay to learn.
* People will pay to be better connected.
* People will pay for an exclusive experience.
* People will pay for a premium experience.
* People will pay for better access to customer service.
* People will pay to avoid hassles.
* People will pay to get things on their own time schedule (when they want it/how they want it).
* People will pay for speed (whatever speed means in your industry).
* People will pay for something that will give them more social clout.
* People will pay for products that are virtual.
* People will pay for information.
* People will pay for more mobility.
* People will pay for more flexibility.
* People will pay for more comfort.

Fun: re-imagine your business (as Tom Peters would say). How might your business change if you tweaked your business model and figured out ways to really increase the value of what you sell (but the value as perceived by your customers… not your ego or historical data).

by Tom Fennell, Yahoo! Canada Finance
Wednesday, July 28, 2010
So far in 2010, Canadians have opened 20 per cent more chequing and savings accounts than last year at this time. That amounts to about $100 billion in new deposits and Canada’s major banks have been fighting for a share of it with incentives, including cash rewards for customers opening new accounts.

While consumers can get cash and travel points to open a new account, there is one conspicuous weapon missing in the banks’ marketing arsenal when it comes to attracting new customers. And that is the lure of higher interest rates, something you won’t find the banks offering on those new savings accounts and products – or old ones for that matter.
On July 20 when the Bank of Canada raised its overnight rate by 0.25 per cent to 0.75 per cent, the increase was immediately passed on to consumers with lines of credit, mortgages and other products that were priced directly off of the prime rate.

Which raises an obvious question: why doesn’t a jump in the bank rate, which can signal a sudden increase in the rate of interest charged on a line of credit, trigger a corresponding interest-rate increase on products such as savings accounts and GICs?
It’s certainly an answer many investors with money sitting in the bank would like to know. After all, with the banks paying between 1 per cent and 2 per cent on many savings products it would take years to generate any kind of return. In fact, if your bank is paying you 1 per cent annually on your savings account it would take 72 years to double your money – at 2 per cent it would take 36 years to double up.
Even worse, with inflation factored in, consumers are actually losing money on bank deposits.
It isn’t likely to get any better, especially with consumers clamouring for the security of savings accounts and GICs. Indeed, according to some economists, in the current environment the banks are under even less pressure today to increase interest rates on savings accounts and GICs than they have been historically.

Mike McCracken, an economist and head of Ottawa-based Informetrica, says as the Bank of Canada raises rates, it allows the major banks to turn around and say, “look at us we’re wonderful guys” withdrawing stimulus just like Bank of Canada governor Mark Carney wanted. They then turn around and increase interest rates on a wide range of lending products – but not on savings or GICs. And notes McCracken, it’s not unusual for the banks to crank up interest rates on many of these products by 0.50 per cent after a 0.25 per cent Bank of Canada increase.
The fact there is a lot of surplus money in the banking system is also helping the banks keep rates low on savings products. “Right now the demand for loans is very low,” says Doug Peters, former chief economist at TD Bank. “Businesses are not expanding or investing, so banks don’t need to raise interest rates on those deposits.”
There are forces at work in the wider market that are also conspiring to keep interest rates on savings and GICs low – even if Carney continues to raise rates.
That’s because investors who were pummeled in the financial crisis don’t want to be beat up again. And when the European debt crisis erupted this spring, they dumped equities and fled to the safety of bank deposits and T-bills.
With so many people seeking shelter in bank deposits and other conservative investments, at one point this spring the government was even able to reduce the yield it paid on products like T-bills, a staple holding in money-market mutual funds.

The fact Europe and the U.S. have so far refused to raise interest rates, doesn’t help Canadian fixed income investors. Their reluctance to raise rates, gives the Bank of Canada the option to move slowly. And by extension, it takes the pressure off the major banks to raise the interest it pays to consumers.
On top of that, there is little sign of inflation, a factor that could force Carney to raise rates at a quicker pace if it moves higher. So savers may have to wait a long time before they see a return to 5 per cent interest rates.
“Eventually interest rates on savings accounts will go up,” says McCracken, “but it won’t be anytime soon.” So, on the one side of the bank ledger they can pass along interest rates increases with impunity, while keeping the interest rates that they have to pay on savings and GICs at historic lows. And as the spread, between what they have to pay out and what they take in widens after each successive interest rate increase, the more money the banks will make.
“It speaks to the power of the Canadian banks,” says Arthur Donner, a Toronto-based economic consultant. “They won’t raise rates until they absolutely have to.”
Still, the Bank of Canada is uniquely positioned to use “moral suasion” to convince the big banks to raise rates on savings products. But it may not be in the best interest of the Bank of Canada to do so at this time.
Donner’s reasoning: with the European debt crisis and the threat of a further economic slowdown still on the horizon, Carney may not be opposed to a wider spread between what the banks pays out in interest and what they bring in. This would allow the banks to build up their capital reserves just in case the economy stalls again.
Still, Donner has little doubt that at some time in the future if the Bank of Canada keeps raising rates, the major banks will be forced to pay consumer more for their money. “In the end,” says Donner, “if Carney keeps raising rates it will balance out.” Consumers can hardly wait.

Canada’s housing market is losing momentum, with supply estimated to have risen by 3% in the second quarter and demand falling by close to 9%. This according to an article by Benjamin Tal, CIBC World Markets. Add to this the impact in Ontario and BC, and you have a sure recipe for a softening market. House prices might fall by 5%-10% in the coming year.
In addition, the number of mortgages outstanding is growing at the slowest pace since 2003, with reduced demand for mortgages most notable among first time buyers, considered the driving force of the market.

If you had to pick one rate for the rest of your mortgage life, and your only two choices were a 5-year fixed or a 5-year variable, which would you take?
Most mortgage professionals (us included) would take the variable, citing long-term low inflation and historical rate studies.
But that doesn’t mean 5-year fixed rates are irrational. On the contrary, longer-term fixed rates are quite suitable for borrowers who can’t withstand interest rate shocks.
With respect to today’s rate environment, it just so happens that prime rate has started increasing from a trough in a rate cycle.
Long story short, variables are still a great bet for many. But, if you:
• Have a tight budget
• Are nervous that prime rate could exceed analyst rate estimates in 18-24 months
• Find an amazing deal on a 5-year fixed
…then no one can blame you for paying more for the insurance of a fixed rate. You might get an earful from variable-rate proponents citing their probabilities, but as George Boole once said: “Probability is expectation founded upon partial knowledge.”

Homeowners who break a closed mortgage before maturity will often make a pre-payment before the mortgage is discharged.

The idea is to reduce the mortgage balance and thereby pay less of a pre-payment penalty.

It’s a great idea if you have the funds to do it. Remember, however, that lenders have different policies on how close to the payout date you can make a pre-payment.

Some lenders, for example, won’t allow pre-payments to be made within 30 days of the date of discharge (the date you pay off your mortgage in full).

Therefore, if you plan to pre-pay a portion of your mortgage to reduce your penalty, remember to do two things:

1. Ask your lender how close to your payout date you can make a pre-payment and still have that payment count towards reducing your penalty. (Allow several days regardless. You don’t want to cut it too close.)
2. Make the pre-payment and then confirm that your lender has applied it to your account before your lawyer requests the payout statement. Otherwise, your pre-payment might not reduce your balance for the purposes of penalty calculation.