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Maybe your mortgage needs a check-up - Andy Holloway, Financial Post

2010-06-15 | 08:12:16

While about 80% of Canadians visit a doctor at least once a year to help ensure they remain physically healthy, the number of people who check their financial health by regularly reviewing their mortgage is far less.
Plenty can change in someone’s life in a year, never mind during the standard five-year mortgage a lot of Canadians sign up for. A career change, kids, retirement or newfound money or it could be that such a major event is on the horizon. All can affect the type of mortgage that fits just right.
“A lot of people don’t like to face up to it but, doing an annual financial check-up is a very smart thing to do,” says Peter Aceto, CEO and president of Toronto-based ING Direct Canada. “Managing your financial lifestyle is just as important as managing your diet and exercise.”
Aceto says people often just wait for a renewal letter before they look at their mortgage, and even then they’ll likely send the contract back without considering if it is meeting their current needs because they feel changing providers or the terms is futile. But they should put just as much thought into a renewal or a review as they did when they signed the initial deal.
Kelvin Mangaroo, founder of RateSupermarket.ca, which compares mortgage rates and brokers across the country, agrees. “Canadian consumers tend to become complacent about their mortgage payments and they could be saving a lot of money.” He says home owners should annually review three main things: their current and expected future risk profile and net income as well as rates.
For example, the more adverse you become to risk, the less likely a variable mortgage will be right for you. Aside from comparing rates, Ratesupermarket.ca has a few other online tools that can help consumers figure if a change is a good thing, such as a mortgage calculator and a mortgage penalty calculator that will show how much you can expect to pay to break your existing mortgage. You can also sign up for e-mail alerts that tell you when rates change.
Rates are an obvious thing to pay attention to. If they’re going up, make sure you can make the higher monthly payment that may come at renewal time, or lock into a fixed rate if you’re on a variable. If rates are dropping below your existing rate, you might want to refinance or renew early.
“You’re making a commitment to be mortgage free in 25 years so you should have a longer term view of what interest rates will look like over that period, says Aceto. “Make sure you’re comfortable with them and comfortable making those payments.”
Even though banks are in the business of getting as much interest from you as they can, many will allow people to pay a lump sum of the principal on the mortgage’s anniversary and increase their monthly payments. An extra $100 a month on a standard $200,000 mortgage could save almost $18,000 in interest and shorten the amortization period by about four years, according to Aceto.
Paying down your mortgage faster may seemingly put a crimp into your future finances if something happens and you need the money — unlike, say, putting it into a tax-free savings account or other low-risk liquid investment. But many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments, says Peter Veselinovich, vice-president of banking and mortgage operations at Winnipeg-based Investors Group.
Of course, it may become more difficult to get those funds back if there is a dramatic downward change in housing values and you haven’t built up enough equity. But that’s where understanding your entire financial situation, not just your mortgage, can help. “Most of us don’t like to think about debt, says Veselinovich. “It’s just something that somehow comes up and ends up as part of our personal balance sheet and we make payments.”
Even something simple such as making renovations could affect the type of mortgage desired. For example, topping up or refinancing an existing mortgage can pay for renovations, providing you’re comfortable with a blended interest rate. If you’re buying a new home, you may be able to port your current mortgage. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage. “Rolling that into your mortgage can significantly save on interest costs and that will help you get out of debt sooner,” says Feisal Panjwani, a Surrey, B.C.-based broker with Feisal & Associates under the Invis Inc. umbrella.
A mortgage can also help you become more tax efficient if you’re thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market. That’s because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.
But the biggest reason for making changes to your mortgage mid-stream may be because it could be a lot easier to do something before your situation changes. “Making changes to your mortgage before you go into a new venture or before you retire would allow you to qualify much easier rather than waiting for your mortgage to come up for renewal,” says Panjwani. Read more: http://www.financialpost.com/personal-finance/mortgage-centre/Maybe+your+mortgage+needs+check/3141368/story.html#ixzz0qpeNQxZh <http://www.financialpost.com/personal-finance/mortgage-centre/Maybe+your+mortgage+needs+check/3141368/story.html#ixzz0qpeNQxZh>
 
Have a great day! 

Carney's big call Paul Vieira, Financial Post

2010-05-31 | 08:21:16

Ottawa -- Bank of Canada governor Mark Carney has had a busy time of it since taking over as the country's central banker 27 months ago, mostly tackling the financial crisis, mapping out the road to recovery and reassuring Canadians that at the end of the day the bank's extraordinary policies would work.

The one thing he has yet to do during his term, however, is raise interest rates. That might be about to change on Tuesday. If he does pull the trigger - and that is what most analysts expect - it won't be after grappling with competing forces that convey two starkly different messages about the economic outlook.

"We are at point where it is a tug of war between structural issues that are facing the eurozone and a very strong economic cyclical backdrop," says Stéfane Marion, chief economist at National Bank Financial.

Weighing on the governor are the economic data, which call out for a rate hike - as much as 50 basis points, some reckon. The data have been consistently strong and surprising to the upside. Job creation is in full swing, with a record 109,000 workers added to payrolls in April; consumers are buying up goods at a healthy pace, tax credits or not; corporate profits are rebounding to pre-recession levels; and inflation is creeping closer to the central bank's preferred 2% target. The sterling fundamentals prompted the central bank last month to ditch its conditional commitment to keep its policy rate at a record low 0.25% until July, leading traders to price in a nearly 100% chance of a rate hike on June 1.

That was until sovereign debt worries exploded in Europe, once Greece formally asked for international help days after the last Bank of Canada rate decision. That sparked an across-the-board retreat in global equity markets, down 9.3% since the beginning of May, as traders sold stocks and poured into risk-averse U.S. treasuries and other government securities on fears that another credit crunch was at hand. Mr. Carney is likely aware of this better than most, given his capital markets background from Goldman Sachs.

The most worrying sign on Mr. Carney's radar screen might be the small but steady increases in the cost of borrowing among banks, a signal European lenders are finding it tough to access cash from their peers on concern over how much Greek, Portuguese and Spanish debt they hold.

In the end, the consensus is Mr. Carney is leaning toward a rate hike - a modest one, though, of 25 basis points. The thinking is, an ounce of prevention now is worth a pound of cure later.

"We can't look at things in a vacuum, because there are so many other factors besides Europe's issues" says Jonathan Basile, an economist with Credit Suisse in New York who closely watches Canadian markets. "The truth is the macroeconomic evidence is outweighing the financial risks right now."

The last time the Bank of Canada raised its benchmark rate was in July 2007, by 25 basis points to 4.5%. At the time, former governor David Dodge said the economy was operating above its production potential, and inflation was likely to stay above its 2% inflation target for longer than forecast.

Little did Mr. Dodge know that the U.S. subprime crisis would morph into the worst financial crisis since the Great Depression, roiling markets and economies around the world. This is why Europe's recent fiscal woes have triggered a case of nerves, and might prompt Mr. Carney to rethink any rate move.

"The Bank of Canada wants to raise rates, but it doesn't have a crystal ball," CIBC World Markets said in a note to clients. "It can't be certain that the recent financial market downturn isn't going to morph into something more severe that would make a rate hike look out of place."

There's another school of thought, though, that suggests markets have overreacted to a regional problem. In this context, it is key to remember the Bank of Canada didn't expect the eurozone to contribute much to global growth, envisaging only 1.2% expansion this year and 1.6% in 2011.

"The European picture will calm down and people will realize it is not as dramatic as being played out," says Carlos Leitao, chief economist at Laurentian Bank Securities.

Yes, he acknowledges, the debt-ridden southern European economies have tough years ahead. But other countries, led by Germany and France, are going to capitalize on the lower euro and boost their exports to emerging economies and North America, which will help offset the drag from the so-called Club Med nations.

Besides Europe, Mr. Carney has other factors to consider.

Canada's sovereign debt levels are indeed much better than the industrialized world, as our politicians like to remind us. But the amount of debt held by households, measured as a percentage of disposable income, stood at a historical high of 146% - of which 98% is mortgage related - at the end of 2009, rating agency DBRS estimates. That would put Canadian households ahead of the United States but behind Britain on this measure. A rate hike would signal it might be time to live more modestly and refrain from too much debt-financed consumption (which helped fuel those nasty asset bubbles that central banks may want to pay more attention to in the aftermath of the subprime debacle).

Mr. Carney's other challenge is to explain why, and what's ahead. He has come off a period where he provided extraordinary guidance to markets. Don't expect similar language from the governor.

If anything, Mr. Marion warns the central bank should refrain from using the type of guidance the U.S. Federal Reserve deployed in 2004, when it signalled a period of "moderate" rate hikes were in the offing.

In retrospect, the Fed's use of the word moderate "encouraged more financial excesses," leading to the subprime bust, Mr. Marion says. "Carney doesn't have to be brusque about it. He has the luxury to start slowly, and leave his options open," from pausing should Europe deteriorate to hiking aggressively, by 50 basis points, if conditions warrant.

Mr. Carney reminded us recently that "nothing is pre-ordained" at the Bank of Canada. He's likely to drive home that point on Tuesday, rate hike or not.
Read more: http://www.financialpost.com/news-sectors/story.html?id=3084621#ixzz0pVYuP0cD

Do you need $1 million for a comfy retirement?

2010-05-28 | 08:03:24

by Diana Cawfield, Bankrate.com
Wednesday, May 19, 2010
When it comes to retirement, there is no shortage of opinions on the need for a hefty $1 million to carry you through your golden years. The demographic trend of living longer and more actively also means extending our financial lives, so suggestions of needing plumper nest eggs are common. Outliving our money is a big concern for many.

While a six-digit portfolio may be the target to meet the lifestyle choices of some people, there are more modest and more achievable financial targets for many others. If you are in the lifestyle camp that requires close to $1 million to retire, and you're comfortable with that, both financially and personally, this article is not for you.

But if you are among the many other investors who will retire with far less than a million dollars, read on to find out how to make your funds last a lifetime.

Retirement less expensive than you think
According to Malcolm Hamilton, a consulting actuary with Mercer, in Toronto, we don't read about the comfortable retiree a lot because it doesn't fit the stereotype. "The stereotype," he says, "is the extravagant lady spending, the impoverished senior or the poor boomer in the sandwich generation having to help the poor senior."

Yet, people who are frugal - not miserly, notes Hamilton - and don't like wasting money often find that they don't spend anywhere near as much as they have saved.

It's all based on what you're used to. According to Hamilton, many people don't increase their spending once they retire because they're already doing what they like and it doesn't cost them very much. "It becomes obvious when they're 10 to 15 years into retirement that they're just getting richer and richer, not poorer and poorer," he says.

Hamilton points out that retirement offers a host of enjoyable, low-cost activities that include local community centres, subsidized courses and discounts on clubs and recreation. Then there's a wide choice of free or affordable activities like walks in the park, playing cards with friends, or reading and watching television for armchair adventures.

The rule of $20
Other positive factors bode well for retiring with more modest means. "Canadians tend to be very conservative about their approach to finances anyway, and our banking system has certainly helped that and it's given retirees right now a greater piece of mind," says Patricia Lovett-Reid, senior vice-president at TD Waterhouse Canada.

In fact, according to her research, close to 70 per cent of Canadian retirees already say their retirement is exactly, or mostly, what they expected. "It's the preretirees who worry about their retirement, because they're not sure how much they're going to need. So when they hear that you need a million dollars, it's overwhelming."

Lovett-Reid credits Russell Investments Canada for the helpful retirement Rule of $20. Essentially, for every dollar of annual income that you expect to need during your retirement, you need to have saved $20 by the time you retire, without inflation indexing.

For example, a couple heading into retirement with $400,000 of registered savings can expect it to generate $20,000 a year in retirement income. "Now, you combine that with an estimated $25,000 of Canada Pension Plan, or CPP, and Old Age Security, or OAS, and this couple is looking at a yearly retirement income of approximately $45,000," says Lovett-Reid.

For illustrative purposes, Lovett-Reid says research from Statistics Canada indicates that the median household income for a married couple is $63,000 gross. Therefore, if you want to maintain, say, 70 per cent of that income, then a couple at age 65 would need just shy of $45,000 a year in retirement, pretax.

For individuals who fall short of a $400,000 portfolio - especially those with no company pension - you're going to require $20,000 of income from your own savings a year to maintain close to that $45,000 in annual income.

"So you're going to have to look at the co-mingling of all your income sources - registered retirement savings, tax-free savings accounts and nonregistered accounts," says Lovett-Reid.

Three job descriptions in retirement
According to Keith Pangretitsch, director of national sales at Russell Investments Canada, to simplify the process of calculating income needs, "we always say every dollar a client has should have a job description."

To that end, he earmarks three main job descriptions for retirement funds. The first is to cover essentials such as food, shelter, transportation expenses, taxes and any other expenses beyond your control.

The second job description, lifestyle, offers flexibility because it is a discretionary expense. You can choose how to use your money when it comes to entertainment, travel, clothing and eating out, along with many other lifestyle choices.

That's not to say that controlling discretionary expenses is an easy task. "I'll put out an economics terms from my university days: We're all utility-maximizing individuals. We all want to do more than less," says Pangretitsch. So, you need to choose investments that will produce the amount of money you need.

While individuals vary greatly in risk tolerance and financial circumstances, a portfolio that offers a balance between risk and return is often necessary to generate growth of capital in retirement. "What we recommend is 60 per cent equity and 40 per cent fixed income to give you the growth that you need and to reduce the risk from equities," says Pangretitsch.

The third job description is planning. "Most people, quite frankly, start planning too late," says Pangretitsch. "I think the regulatory environment is good for folks to retire well, but we also need that added piece of financial planning to ensure that we're on track. Retirement is far too complicated, with tax issues and reduced income issues, not to take it seriously."

Diana Cawfield is an award-winning freelance writer, specializing in finance and health sciences.
Have a great weekend!

 

Loonie's plunge signals long-term risk for Canadian and global economies

2010-05-26 | 18:59:19

By Julian Beltrame, The Canadian Press
OTTAWA - The Canadian dollar plunged to its lowest level in eight months before recovering Tuesday, sending a clear signal that Europe's debt crisis has the potential to reach across the Atlantic and impact Canada's mending economy.
The loonie has lost about eight per cent of its value over the last month in reaction to fears in global equity and financial markets about the lasting imprint of government debt, and now a new risk — the threat of war on the Korean peninsula.
Over the weekend, the Bank of Spain had to bail out Cajasur — the second savings bank in that country to receive public money since March 2009. On Monday, four other Spanish savings banks announced plans to merge amid concerns over solvency in the sector.
Tension in Asia has also risen since last week after North Korea was accused of the sinking in March of a South Korean warship. Seoul has called for sanctions against the North.
The Canadian dollar closed down 0.94 of a cent at 93.46 cents US on Tuesday after bouncing off a low of 92.18 cents US earlier in the day.
The loonie is not alone in seeing its value eroded. Other commodity currencies have also taken a hit in the flight to dependable and liquid U.S. Treasury bills.
The short-term impact on the Canadian economy of frightened financial markets and a loonie closer to 90 cents than parity, ironically, may be mostly positive.
A weaker dollar will give a much-needed boost to manufacturers and exporters who prosper whenever they can sell their products abroad with a currency discount.
And the unsettling of financial markets has caused real interest rates to soften for mortgages and other loans. Many Canadian banks have dropped posted rates on five-year mortgages to below six per cent.
As a result, prospects that Bank of Canada governor Mark Carney will start hiking rates next Tuesday have gone from a virtual sure thing a month ago to a coin-flip today.
Export Development Canada's chief economist, Peter Hall, welcomed the fact that the loonie's wings have been clipped, saying that a dollar at par had the potential to take two or three points off economic growth next year — the equivalent of about $30 billion to $45 billion in output.
But the longer term implications may be that Canada's recovery won't go as smoothly as many had hoped. The loonie is acting as a proxy for the global economy: when the Canadian dollar is down, it means so are prospects for global expansion, say economists.
"Everything and anything that happens in the world affects Canada," said TD Bank chief economist Don Drummond, noting Canada's dependence on trade and on the prices of commodities it sells to the rest of the world.
The longer term outlook is that many governments, not just the poor cousins of Europe, will soon need to deal with debt burdens that cannot be sustained, and the ensuing clampdown on spending will stall the recovery.
Several economists, including David Rosenberg of Gluskin and Sheff, said the risk of a second downturn in key economies, including the United States as Washington withdraws stimulus spending, has become very real. Much like in 2008-09, Canada would become collateral damage, they said.
"For a small, open (and) commodity-sensitive economy whose entire recession in 2009 was imported from abroad and south of the border, the answer is yes," Rosenberg said when asked whether a second dip is possible.
That still remains a minority view, although the TD's Drummond puts the risk at about 20 per cent.
The key question is whether the European crisis is an overblown temporary crisis, or the precursor of government debt woes in the United Kingdom, the United States and other larger economies.
Scotiabank portfolio manager Andrew Pyle said he believes the fears over Europe will blow over in a matter of weeks, which will cause both oil prices and the loonie to recover to previous levels.
"I think people will be surprised to see how quickly that will happen. I wouldn't be surprised to see us back to parity in July," he said.
But it's the longer-term prospects that most worries Drummond. He says the perception that the situation will stabilize if the bailout of Greece and other countries works, or that things will implode if the bailout doesn't work, is simplistic.
"Those countries (with large debts) aren't getting out of this any time soon . . . easy bailout or not," he said.
http://ca.news.finance.yahoo.com/s/25052010/2/biz-finance-loonie-s-plunge-signals-long-term-risk-canadian.html 

Friday's inflation rate expected to open door to interest rate hikes: economists

2010-05-19 | 16:49:56

By Julian Beltrame, The Canadian Press
OTTAWA - Canadians likely have only two weeks left to enjoy historically low interest rates.
With global markets beginning to stabilize following the recent fears over a Greek debt default, economists say the pieces are falling into place for the Bank of Canada to move off its emergency 0.25 per cent rate on June 1.
Economists — and markets — have already pencilled in a doubling of the policy rate in two weeks. But that is only a beginning say analysts who believe governor Mark Carney will keep on hiking rates through the rest of the year.
Even the TD Bank, which only a few months ago was advising Carney to wait until at least the third quarter of 2010, is now calling for an incremental hike beginning in June.
The reason, says the bank's director of forecasting Beata Caranci, is that the Canadian economic recovery is well ahead of schedule with what looks like two consecutive quarters of five per cent and beyond growth, a jobs recovery more robust than predicted with another 109,000 added in April, and inflation — the key indicator for the central bank — heading toward two per cent.
"The bank is looking a year or year-and-a-half out, and they are looking at an output gap that is not going to be there anymore, so they've got to start adjusting now to get the interest rate at what would be considered more neutral," she explained.
"And if they don't go now, it could mean we see bigger adjustments down the road," she added.
Higher rates are meant to slow down excessive borrowing and head off asset bubbles like an overheated housing market, which the central bank has already highlighted as a risk. Cheap money is also seen as destabilizing in the long term, much as happened in the United States in the early part of the decade and eventually led to the most recent crisis.
Economists caution that the anticipated hikes by the central bank should not be seen as an attempt to slow down activity, but merely as moving to a more traditional posture. With inflation at near two per cent, the current 0.25 per cent level is actually a negative interest rate, they note.
The TD Bank and many others believe Canada's policy rate will hit 1.5 per cent by year's end, more in line with inflation.
Carney gave a strong hint last month that he was preparing to move, surprising observers by dropping his year-long conditional pledge not to hike rates until at least July.
He has since added an element of doubt into expectations by noting that he considered the very act of removing the conditional commitment to have been a policy tightening measure. The rate-hiking narrative took another detour earlier this month with the recent turmoil in equity and financial markets over government debt issues in southern Europe — that added new uncertainty to the global recovery scenario.
But unless Europe again flares up in a major way, the only question remaining for Carney will likely be answered Friday with the release of April inflation data by Statistics Canada, say economists.
The consensus is that headline inflation will rise to 1.6 per cent and core underlying inflation — the index the central bank closely watches — will edge up to 1.8 per cent.
Those numbers are still below the bank's two per cent target but economists say they are worried because inflation is digging in at a time when the economy is still operating far below capacity, and at a time when the Canadian dollar is near parity.
That is not the case in the U.S., where inflation is actually heading south and could once again approach zero by year's end.
"Even with the current volatility in financial markets, the Canadian story remains intact as underlying fundamentals continue to improve alongside strong corporate and household balance sheets," write Scotiabank economists Derek Holt and Karen Cordes Woods in forecasting an interest rate hike.
Bank of Montreal economist Douglas Porter says there is still a chance Carney will wait until July 20, or even later, especially if the European crisis threatens to leak into North American credit markets, or if there's a big downward surprise in underlying inflation Friday.
Increasing rates in Canada, especially since the U.S. is likely to keep its policy rate at zero until 2011, will put added upward pressure on the Canadian dollar, which will further depress the country's manufacturing and exporting sectors.
But Caranci believes the dollar impact will be minor, because markets have already priced in several moves by Carney ahead of the U.S. And the loonie's recent dip below parity to about 96 cents US has partly removed an important impediment to act on rates for the Bank of Canada, she adds. http://ca.news.finance.yahoo.com/s/18052010/2/biz-finance-friday-s-inflation-rate-expected-open-door-interest.html 

Canadian mortgage market can manage risks

2010-01-14 | 08:39:10

Press: Research shows Canadian mortgage market can manage risks

New data collected by CAAMP indicates homeowners are borrowing less, not more, than they can afford to borrow

Toronto, Ont. (January 14, 2010) – New research using data collected by the Canadian Association of Accredited Mortgage Professionals (CAAMP) from its corporate members strongly suggests that Canadian mortgage lenders and borrowers, including first time home buyers, are being extremely prudent with their borrowing and lending.

Last month, CAAMP surveyed members who issued more than 40,000 mortgage loans totalling $10 billion, which were funded during 2009 (the data is for home purchases only and excludes renewals or refinances of existing mortgages). The dataset represents about one-sixth of total mortgage activity for home purchases in Canada. The research is published in a report titled Revisiting the Mortgage Market – risk is small and contained.

Key findings include:

•    86 per cent of these home buyers chose fixed rate mortgages. This share fell late in the year as variable rates became more attractive (at 2.25 percent compared to 4 percent for fixed rates)
•    Among borrowers who chose fixed rates, a significant number opted for longer terms – less than 5 per cent chose terms of two years or less. 20 percent took three year terms, 5 per cent four years, leaving 70 percent with a fixed rate for five years or more
•    The vast majority of people who took out their first mortgage last year borrowed less than they could afford to, as their Gross Debt Service (“GDS”) ratios are far below allowed maximums, even at the higher interest rates that are used to qualifying them for their mortgage
•    The high share of fixed rate mortgages and low GDS ratios for home buyers are contrary to perceptions that consumers and financial institutions are taking on more risk

“This new research shows that Canadians are assessing their abilities and vulnerabilities,” said Jim Murphy, AMP, President and CEO of CAAMP. “They are being prudent and the vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates in to their mortgage decisions.” 

Will Dunning, CAAMP Chief Economist and author of this new report said that a small minority of homebuyers are cutting it close when it comes to affordability. He stressed that “this dataset is primarily focused on first-time homebuyers who are considered to be most at risk. Each year, about 2.5 to 3 per cent of Canadian households make a first-time home purchase. Our data shows that only a small percentage of them are pushing-the-envelope – about 4,000 households which amounts to a tiny fraction of the 13.25 million homeowners in Canada. For those who borrowed in prior years, risks are even lower.”

Speaking to the stress tests conducted by CAAMP, Dunning said that “the bottom line from the simulations is that even though mortgage payments will probably rise for most borrowers, the increase in their incomes will more than offset the higher payments. All in all, the degree of risk from rising mortgage rates appears to be small and manageable.”

For a copy of the report Revisiting the Mortgage Market – risk is small and contained, please visit: www.caamp.org.

For more information or to request an interview, please contact:

Renée Mellow, Media Profile            Jim Murphy, CAAMP
(416) 504-8464                    416-644-5465 / 416-940-0011 / 1-888-442-4625
renee.mellow@mediaprofile.com         jmurphy@caamp.org