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Economic News This Week
Wednesday – Mortgage Rates.
RBC is now cutting its two-, three-, four- and five-year fixed mortgage rates each by 10 basis points. In an emailed statement, the bank said that some mortgage lenders have recently been pricing at lower rates, prompting it to move.
Royal Bank is often a price leader when it comes to mortgages, and other big banks frequently follow suit after it changes its prices. Its five-year fixed mortgage rate is now 3.69 per cent.
Mortgage prices tend to follow changes in five-year government bond yields because of the impact that those yields have on banks’ funding costs. The yield on five-year government of Canada bonds has fallen from 1.95 per cent on December 31st to 1.71 per cent on January 16th, according to Bank of Canada data, although it fluctuated during that time.
Canadian bond yields tend to follow U.S. bond yields. Yields began rising last May after U.S. employment numbers came in much better than expected, raising hopes for the U.S. economy. Then they shot up further after U.S. Federal Reserve chairman Ben Bernanke suggested the central bank could start tapering its asset-buying program, a signal that he thought the economy’s health was improving.
While the U.S. central bank has begun tapering, December jobs numbers and some other recent data have been disappointing, and caused bond yields to fall.
Most economists still expect that both yields and mortgage rates will tick up gradually through 2014, as the U.S. economy improves and the central bank continues to back off of its asset-buying program, known as quantitative easing.
But as Ms. Richard points out, it is possible that the U.S. economy will prove to be weaker than expected, and that could result in further decreases in bond yields and mortgage rates.
Royal Bank of Canada, which normally issues a press release when it changes its mortgage rates, made this move quietly, simply posting the new rates on its site. The news was reported this weekend by the blog Canadian Mortgage Trends.
Bank of Montreal dropped its five-year rate to 2.99 per cent early last year, spurring a price battle that angered Finance Minister Jim Flaherty. Mr. Flaherty has taken numerous steps, such as tightening the mortgage insurance rules, to prevent consumers from taking on too much mortgage debt. Policy-makers have been trying to warn consumers that, at some point, rates will rise.
Today’s Bank of Canada (BoC) interest rate decision was reassuring for variable-rate borrowers.
- The Bank announced that Canada’s key lending rate will remain just 75 basis points above its all-time low.
- The Bank suggested its next move is just as likely to be a rate cut as a rate hike.
- It said the risk of falling inflation “has grown in importance” and that inflation won’t rise back to its target for “about two years” (suggesting even less chance of a prime rate increase through 2015). Even if inflation does return to its 2% target, that alone isn’t enough reason for the Bank to raise rates. So essentially, it’s Pleasantville right now for variable-rate borrowers, with no hikes in sight.
The Toronto stock market gained marginal ground Wednesday after the Bank of Canada left its key interest rate unchanged, but warned of persistent low inflation.
The S&P/TSX composite index moved forward 36.43 points to close Wednesday at 13,988.20, back to within sight of the psychologically-important 14,000 mark.
The Canadian dollar tumbled 0.97 cents, to 90.20 cents U.S., following the bank rate decision.
March cooper fell 1.4 cents to $3.34 U.S. a pound. Teck Resources faded 63 cents to finish at $27.49
On the TSX, the energy sector rose as Imperial Oil climbed 31 cents to $46.63, while Suncor acquired 51 cents to $38.01
TransCanada Corp. shares gained 38 cents to $48.85 as it officially started shipping crude oil on the southern portion of its controversial Keystone XL pipeline.
Information technology stocks gained, with shares of BlackBerry rising 9.9%, or $1.08, to $11.82.
BlackBerry announced Tuesday that it is selling the majority of its commercial real estate holdings in Canada, but the struggling smartphone maker refused to say how much it expects to make from the deals.
The company once known as Research In Motion has been trying to change the course of its money-losing operations under the leadership of new CEO John Chen. BlackBerry shares are up about 50% from the start of the year.
In other corporate developments, Air Canada said its domestic pension plans had a small surplus as of Jan. 1, according to preliminary estimates — contrasting with a $3.7-billion solvency deficit a year earlier. Shares of the airline were up 7.7%, or 69 cents, to $9.54.
On the Canadian economic calendar, Bank of Canada Governor Stephen Poloz announced the bank is leaving its overnight lending rate at 1%, where it’s been since September 2010.
Friday – The TSX dropped 200 points over concerns over emerging markets lower economic forecasts.
TORONTO — The Toronto stock market plunged more than 200 points Friday as emerging market worries persuaded investors to avoid riskier assets like equities and commodities.
The S&P/TSX composite index dropped 215.21 points to 13,717.76 in a broad-based sell-off.
The Canadian dollar was ahead 0.21 of a cent to 90.31 cents US as Statistics Canada said the annual inflation rate rose to 1.2 per cent in December, compared with 0.9 per cent in November, largely because of higher gasoline prices.
Losses were even steeper in New York where the Dow Jones industrials racked up a sizable triple-digit loss for a second day, falling 318.24 points to 15,879.11 after plunging 176 points on Thursday. The Nasdaq was 90.7 points lower to 4,128.17 while the S&P 500 index was down 38.17 points to 1,790.29.
Investors have been worried about sharp drops in the values of currencies in several emerging markets, including Turkey, Russia, South Africa and Argentina.
These drops were sparked by moves by the U.S. Federal Reserve to cut back on its massive bond purchases, a key stimulus measure that fuelled a rally on stock markets last year and also kept long-term rates low. But U.S. bond yields have risen as the Fed moves to taper its purchases.
“If the expectation is in the U.S. that yields start going up, I think the investors who are now overseas in the Turkish, Argentinian, South African or Venezuelan bond markets don’t see the need to stay there anymore — so they repatriate their money,” said John Tsagarelis, portfolio manager at Manulife Asset Management.
“So there’s a pretty quick outflow and you’re seeing that through the transmission mechanisms of the currencies first and then obviously the bond market and then things follow from there.”
The rout in emerging market assets began a day earlier following signs that manufacturing was contracting in China, a major driver of global economic growth.
Also weighing on markets has been a slew of fourth-quarter earnings reports out this week that have disappointed on revenue growth.
“Many companies last year were coming in line or just coming in slightly below revenue expectations and then beating on EPS because of cost cutting and issues related to maintaining margins and so forth,” Tsagarelis said.
“But I think if you don’t have topline growth, cost reductions can only go so far.”
Investors are wary of a U.S. market that hasn’t experienced a serious correction in almost 18 months. The S&P 500 soared about 30 per cent last year.
Much of last year’s rally was made possible by Fed stimulus in the form of massive bond buying. But the central bank announced last month it was cutting those purchases by US$10 billion a month to $75 billion.
The Fed holds its next interest rate meeting next week and traders will be anxious to see if the Fed reduces its asset purchases further.
In earnings news Friday, Procter & Gamble said its second-quarter net income fell 16 per cent to US$3.43 billion, or $1.18 per share as the world’s largest consumer products maker faced tough comparisons from a year ago, the stronger dollar and flat sales globally. But its adjusted earnings still beat expectations. Revenue was flat at $22.28 billion, short of the $22.34 billion in revenue analysts expected but its shares headed up 1.2 per cent to $79.18.
North American indexes fell sharply during the week with the TSX down 1.23 per cent while New York’s Dow industrials gave back 3.52 per cent.
The industrials group led decliners on Friday, down 2.55 per cent with Canadian National Railways (TSX:CNR) losing $1.77 to $57.93 while Canadian Pacific Railway (TSX:CP) dropped $7.22 to $156.88.
The base metals sector was close behind, down 1.98 per cent as March copper declined a cent to US$3.278 a pound following a five-cent retreat Thursday on the China manufacturing data. Teck Resources lost 54 cents to C$26.61 and HudBay Minerals (TSX:HBM) lost 37 cents to $8.93.
Financials were also a weight, down 1.61 per cent with Manulife Financial (TSX:MFC) 94 cents lower to $20.86, while Royal Bank (TSX:RY) gave back 93 cents to $70.49.
The energy sector lost 1.38 per cent with the March crude oil contract down 68 cents to US$96.64 a barrel. Canadian Natural Resources (TSX:CNQ) fell 71 cents to C$35.47 and Suncor Energy (TSX:SU) shed 89 cents to $36.91.
The February gold bullion contract rose $2 to US$1,264.30 an ounce as the gold sector lost early momentum and turned down about 0.7 per cent. Barrick Gold (TSX:ABX) lost 38 cents to C$21.05 and Kinross Gold (TSX:K) faded nine cents to C$5.15.
The tech sector was the main advancer, with shares in business software company Open Text Corp. (TSX:OTC) running ahead $10.81, or 10.79 per cent, to $111 as it posted a quarterly profit of US$53.5 million or 90 cents a share, down from $61.1 million a year ago. Revenue increased to US$363.5 million from $352.2 million. Open Text also said that it will split its stock two-for-one next month.
How To Crush Mortgage – MSN money sense –
What you need to know to pay off your mortgage…fast. – Opaque contracts – Stiff penalties. Unnecessary insurance fees. Mortgage documents are full of traps that make it extremely difﬁcult to pay off your biggest debt. MoneySense shows you how to pay off your mortgage early and become debt-free sooner than you imagined
1. Polish off your credit score – If you’ve always paid off your debt in a timely manner, your credit score should be ﬁne. But that doesn’t mean you couldn’t have any unexpected surprises, says Toronto fee-only adviser Jason Heath. He cites the example of a client who was buying a condo and was unaware she had $300 outstanding on a Holt Renfrew card. It took her more than three months to repair her credit rating. While that single infraction wouldn’t have been enough for a bank to deny her a mortgage, it could have resulted in a signiﬁcant jump in her interest rate. Moshe Milevsky, an author and ﬁnance professor at the Schulich School of Business, says people applying for mortgages should pull their credit scores six to 12 months in advance to make sure there’s nothing wrong. “Get your credit report from all the bureaus,” he advises. Also, try to avoid job volatility for at least six months before applying as this will make your income appear more stable in the eyes of the banks.
2. Maximize your down payment
While all home mortgages in Canada require a minimum 5% down payment, paying 20% upfront is one of the single biggest cost-cutting measures a borrower can make. Not only will you owe the bank less principal and interest, but critically you will avoid having to pay Canada Mortgage and Housing Corporation (CMHC) insurance premiums that would add thousands of dollars to your mortgage. CMHC mortgage loan insurance doesn’t protect you—it protects your bank if you default. It’s mandatory in Canada for down payments from 5% to 19.99%. (This insurance can also be purchased through Genworth, a private company.) And the cost is substantial—for instance, if you only put a 5% down payment on a $350,000 home, the CMHC premium will be a hefty $9,144.
If you can’t afford an initial payment of 20%, putting down 10% to 15% will still reap major ﬁnancial savings. “Those are the insurer breakpoints where insurance fees drop,” says Vancouver mortgage broker Rob McLister. “For example, putting down 10% instead of 9.9% saves you 0.75 percentage points off your entire mortgage amount. That’s $1,500 on a $200,000 mortgage.” For those looking to boost their down payments, the Home Buyers’ Plan is a popular option; it lets you withdraw up to $25,000 in a calendar year from an RRSP to put toward a home you are buying (or building).
One of the best strategies for avoiding mortgage default insurance premiums—and to get into the market sooner—is to buy a house that ﬁts your budget. “Sometimes you can’t move into your dream house as quickly as you want,” says Jason Heath. “But with a smaller property you’re that much closer to having that 20% down payment, not to mention money left over.” That was the strategy Anne and Rene followed back in 1998 when they bought a $210,000 suburban starter home in Mississauga, Ont. “It was just the two of us and the house was reasonable. It wasn’t a huge mansion,” says Anne.
3. Get the best rate
Prospective home buyers often stick with their own ﬁnancial institutions when applying for mortgages, but it pays to shop around. Credit unions and non-direct lenders, known as monolenders, will offer a discount—sometimes just a fraction of a percentage point—that will save you money on interest payments compared to larger lenders. For those worried about getting mortgages from more obscure companies, Heath says to remember you’re borrowing, not investing. “The fact it’s a more obscure institution makes it no riskier than a bank. You’ve already got the money.”
Heath recommends scanning the major rate comparison websites—such as Ratesupermarket.ca or Ratehub.ca—to get a general sense of where the market is. Also be sure to ask your lending institution if the interest on your mortgage will be compounded monthly or semi-annually. The less often the interest is compounded the better—semi-annual compounding could save you hundreds of dollars or more in interest.
If you’re not comfortable negotiating on your own, a mortgage broker will do that on your behalf for free. Mortgage brokers are paid a ﬁnder’s fee by the lender. There’s no charge for a pre-approval and no obligation. “We’ve always used mortgage brokers,” says Anne. “When you go into a bank you have to haggle for a lower rate. My husband and I don’t like to haggle.”
Normally variable-rate mortgages are a better deal than ﬁxed-rate mortgages because you pay a premium for the security of locking into a rate. However, that doesn’t appear to be the case right now, says Jason Heath. “Fixed and variable rates have almost been identical for ﬁve years—2.9% on ﬁxed and 2.8% on variable,” he says. “So, arguably the cost of locking into a ﬁxed-rate mortgage is so cheap that it’s more compelling to do so.”
4. Watch the fine print
Securing a low interest rate can shave years off a mortgage, but equally important are the terms of your contract. “Not looking into that and just going by the rate can get you into trouble,” says Calgary mortgage broker Joe Jacobs. For instance, when the Bank of Montreal was the ﬁrst major lender to drop its ﬁve-year lending rate to 2.99% early in 2012, you couldn’t break the mortgage to switch to another lender. “That’s a fairly signiﬁcant thing,” says Jacobs, “but a lot of clients didn’t know what that was.”
This is where experienced mortgage brokers can make a difference, he says. They will review any restrictions or potential penalties on the mortgage that may end up costing you far more than a small rate difference.
Prepayment privileges also go a long way toward helping pay off a mortgage faster. It may seem unfair, but most mortgages limit your ability to pay off your debt early because the ﬁnancial institutions will lose the interest revenue that they were expecting. Most mortgages allow borrowers to make annual prepayments of 10% to 20% of principal, without extra fees, with the increased payment amount going directly towards the principal. Just be sure to inquire about the details, as some “no frills” mortgages may prohibit this option. Also be aware that payout penalties—the fees you’ll pay if you break your mortgage early—can sometimes cost tens of thousands of dollars.
5. The right amortization
Those who want to pay off their mortgages sooner should choose the shortest possible amortization within their ﬁnancial means, or, as Moshe Milevsky, puts its: “as short as possible until it hurts.” While the typical amortization period is 25 years, it can be as short as 15 years, or as long as 35 years (if you made a down payment of 20% or more on your home). Forcing yourself to pay off the mortgage in fewer years translates into lower interest costs and substantial savings. The major hitch, however, is that your regular payments will be much higher.
To give yourself the best of both worlds, Vancouver mortgage broker Mark Fidgett advises going with a longer amortization, but setting your regular payments higher with prepayment privileges. In effect, you could be paying off a 20-year mortgage in 10 years, but you’d also have the ﬂexibility to switch back to smaller installments if you were to experience any changes like a job loss or the birth of a child. “That way, you’re in control,” says Fidgett. Your payment schedule can also make a big difference. Payments can be made every month, twice a month, every two weeks or weekly. Going with one of the latter two options is preferable because it will accelerate your payments by an additional two weeks every year. For instance, over a 25-year amortization period on a $350,000 home with a 3% rate you would save more than $18,000 in interest by going with an accelerated biweekly plan.
6. Prioritize your mortgage
Maximizing your down payment and procuring the best rate and terms possible will save you thousands of dollars. But extra payments will have the biggest impact. To do that, you’ll have to make some tough decisions about your spending and cut out non-essential items, such as family vacations and other luxuries. You may need to stop saving for retirement, depending how serious you are about being free of your mortgage. While that may seem extreme, those who free up their home debt quickly can easily make up for lost investment time later on, provided they funnel cash that previously went to their mortgage into retirement savings.
Remember that paying off debt has the same impact as saving, as both add to your net worth. However, most people’s retirement money is in investments that may or may not gain value, while money paid against the mortgage gives you a guaranteed return by saving you interest.
Nicholas and Kathy followed this strategy, paying off their $434,000 mortgage on their Markham, Ont. home in six years. “We didn’t have extravagant lifestyles,” he says. “We didn’t go to Europe or anything.” Instead, they opted for an open mortgage, which has a higher interest rate but no penalty for making extra payments. Several years of sacriﬁce and a few $20,000 and $30,000 lump-sum payments helped them meet their goal. These days, they’re quickly catching up on their RRSPs and have started RESPs for their young children—all without the burden of a large mortgage hanging over their heads
Have a fantastic week, be healthy and prosperous,
Photo by Ian Muttoo