• TSX -49.18 hurt by weakening oil prices and after the U.S. futures regulator said it would review possible position limits on gold and silver
• DOW +29.78 as Intel Corp., the world's biggest chip maker by volume, surpassed analyst estimates of 30cs a share. Earnings came in at 40c a share, a big improvement from 4c a share a year ago. Investors see the chip maker's earnings as a sign of business and consumer demand in the overall economy
• Dollar +.68c to 97.71cUS
• Oil -$.26 to $79.39US per barrel. as weak U.S. economic signals and high inventories spurred fears of a sluggish rebound in demand in the world's largest energy consumer. Also hurting prices was a proposal by the U.S. regulator to limit how many energy contracts hedge funds, investment banks and other speculators can control.
• Gold +$6.20 to $1,142.60USD per ounce
Ontario's battered economy picked up in 3rd quarter, 1st gain since recession
THE CANADIAN PRESS, 2010
TORONTO - Ontario's battered economy picked up in the third quarter of 2009, the first gain since it sputtered into recession.
The province's real gross domestic product increased 0.5 per cent from July to August, largely due to improvements in the auto sector, Ontario's Ministry of Finance reported Thursday.
That surpassed Canada's real GDP, which rose 0.1 per cent in the same period. The U.S. economy rose 0.6 per cent in the third quarter.
Ontario's growth follows four consecutive quarters of declines, including a drop of 1.0 per cent from April to June.
It's a good start, but Ontario isn't out of the woods yet, said TD economist Derek Burleton.
"Until many of the industries begin to make up a significant amount of the ground lost, it's hard to claim victory," he said.
Job numbers haven't turned around either, he noted.
According to Statistics Canada, Ontario lost an estimated 16,600 jobs in December. It gained 2,000 full-time jobs but lost 18,600 part-time positions. However, the unemployment rate was unchanged at 9.3 per cent.
The job numbers show that unemployment remains at a high level, said Alicia Johnston, a spokeswoman for Ontario Finance Minister Dwight Duncan, who was unavailable for comment.
"While this modest growth in Ontario's economy is encouraging news, our families and businesses are still feeling the effects of the global downturn," she said.
The ministry said Ontario's third-quarter growth reflected gains in all major spending areas, including consumer, business investment and government expenditures.
Consumer spending rose one per cent in the third quarter, as more people purchased vehicles, furniture and appliances, clothing and footwear and natural gas, it said.
Spending on motor vehicles and parts increased 5.7 per cent during the three-month period.
Auto production is still almost 50 per cent below levels posted at the beginning of 2007, the ministry said.
However, auto industry output grew 16.8 per cent in the third quarter, as several assembly lines resumed production following a big market downturn in the second half of 2008.
Business investment on plant and equipment rose 7.6 per cent. Exports also increased 4.2 per cent and imports rose 6.5 per cent following three consecutive quarters of declines.
Residential construction investment spending rose 0.6 per cent, following a 0.8 per cent gain in the second quarter. Spending on new housing construction slipped 11.2 per cent - the seventh consecutive quarterly decline - while renovation activity surged 5.8 per cent.
Obama: Tax banks to recover remaining cost of public’s big bailout; ‘We want our money back’
BY JIM KUHNHENN
WASHINGTON — U.S. President Barack Obama told banks Thursday they should pay a new tax to recoup the cost of bailing out foundering firms at the height of the financial crisis. “We want our money back,” he said.
In a brief appearance with advisers at the White House, Obama branded the latest round of bank bonuses as “obscene.” But he said his goal was to prevent such excesses in the future, not to punish banks for past behaviour.
The tax, which would require congressional approval, would last at least 10 years and generate about $90 billion US over the decade, according to administration estimates. “If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers,” Obama said.
Advisers believe the administration can make an argument that banks should tap their bonus pools for the fee instead of passing the cost on to consumers.
The president’s tone was emphatic and populist, capitalizing on public antipathy toward Wall Street. With the sharp words, he also tried to deflect some of the growing skepticism aimed at his own economic policies as unemployment stubbornly hovers around 10 per cent.
The proposed 0.15 per cent tax on the liabilities of large financial institutions would apply only to those companies with assets of more than $50 billion — a group estimated at about 50. Administration officials estimate that 60 per cent of the revenue would come from the 10 biggest ones.
They would have to pay up even though many did not accept any taxpayer assistance and most that did have repaid the infusions.
Obama said big banks had acted irresponsibility, taken reckless risk for short-term profits and plunged into a crisis of their own making. He cast the struggle ahead as one between the finance industry and average people.
“We are already hearing a hue and cry from Wall Street, suggesting that this proposed fee is not only unwelcome but unfair, that by some twisted logic, it is more appropriate for the American people to bear the cost of the bailout rather than the industry that benefited from it, even though these executives are out there giving themselves huge bonuses,” Obama said.
He renewed his call for a regulatory overhaul of the industry and scolded bankers for opposing the tighter oversight in legislation moving through Congress.
“What I’d say to these executives is this: Instead of setting a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I’d suggest you might want to consider simply meeting your responsibility,” Obama said.
At issue is the net cost of the fund initiated by the Bush administration to help financial institutions get rid of soured assets. The $700 billion Troubled Asset Relief Program (TARP) has expanded to help auto companies and homeowners.
Insurer American International Group, the largest beneficiary at nearly $70 billion, would have to pay the tax. But General Motors Co. and Chrysler Group LLC, whose $66 billion in government loans are not expected to be repaid fully, would not.
Administration officials said financial institutions were both a significant cause of the crisis and chief beneficiaries of the rescue efforts, should bear the brunt of the cost.
Bankers did not hide their objections.
“Politics have overtaken the economics,” said Scott Talbott, the chief lobbyist for the Financial Services Roundtable, a group representing large Wall Street institutions. “This is a punitive tax on companies that repaid TARP in full or never took TARP.”
Even before details came out, Jamie Dimon, chief executive of JPMorgan Chase & Co., said: “Using tax policy to punish people is a bad idea.”
Obama is trying to accelerate terms that require the president to seek a way to recoup unrecovered money in 2013, five years after the law was enacted.
So far, the Treasury has given $247 billion to more than 700 banks. Of that, $162 billion has been repaid and banks have paid an additional $11 billion in interest and dividends.
In Congress, Democrats embraced Obama’s proposal while Republicans rejected it.
“I think it is entirely reasonable to say that the industry that, A, caused these problems more than any other and, B, benefited from the activity, should be contributing,” said Democratic Rep. Barney Frank of Massachusetts, chair of the House Financial Services Committee.
But Republican Rep. Scott Garrett of New Jersey, who’s on Frank’s committee, called it a “job-killing initiative that will further cripple the economy by increasing fees passed on to consumers and small businesses, while reducing consumer credit.”
The Associated Press
Friday, January 15, 2010
Wednesday, January 13, 2010
Financial Update For Jan. 13, 2010
• TSX -126.94 with commodity stocks bearing the brunt of the selloff as aluminum giant Alcoa Inc. delivered disappointing earnings and China moved to cool off a hot economy.
• DOW -36.73
• Dollar -.24c to 96.22cUS
• Oil -$1.73to $80.79US per barrel. the Chinese action to curtail economic growth put pressure on commodity prices because of concerns about a possible slowing of demand.
• Gold -$21.80 to $1,128.90USD per ounce
Canada falls back into trade deficit as dollar, low demand stalls exports
JULIAN BELTRAME, THE CANADIAN PRESS
THE CANADIAN PRESS, 2010
OTTAWA - Canada was pulled back into a trade deficit in November as the country faced twin headwinds of both a strong loonie and weaker demand for exports, after a surprisingly strong performance the previous month.
The value of exports from Canada rose 1.1 per cent from October, but imports jumped 3.9 per cent, producing a deficit of $344 million. In October, saw Canada posted its first trade surplus in months at $503 million.
In terms of volume, exports fell a disappointing 0.1 per cent in November, Statistics Canada reported.
Economists say with the loonie worth nearly as much as the American dollar, and potentially reaching parity within the year, the prospects for 2010 remain bleak for Canadian exporters.
"Don't look for a quick return to the halcyon days of big surpluses any time soon with domestic demand reviving faster than U.S. spending, and the Canadian dollar remaining lofty," BMO Capital Markets economist Douglas Porter wrote in an analysis of the trade data.
On Monday, Prime Minister Stephen Harper blamed soft international demand and the strong loonie for the weakness in Canada's manufacturing sector and slow jobs recovery.
But Export Development Canada offered some modest hope Tuesday, saying its semi-annual trade confidence index rose to 77.4 in the fall of 2009 from 68.5 during the spring.
"Trade is definitely in a growth mode, but we can't forget the starting point," said EDC chief economist Peter Hall. "Canadian exports took a 20 per cent hit in 2009, six times greater than any annual decline in recent memory. What exporters are saying is that they expect to start climbing out of that chasm."
And Hall believes exporters will be getting a break from the currency in the latter half of this year, although many other analysts see the loonie remaining near or above par with the U.S. dollar for most of 2010.
"We think the drivers of the currency are out of whack with reality," Hall explained. "Base metal prices seem a little too high and oil prices now are more indicative of an economy that is fully recovered than it actually is." Hall says he believes the Canadian dollar will slump to about 86 cents US in the second half of 2010, about 10 cents US lower than its current level.
Still, economists are not looking for a quick turnaround in Canada's trade performance.
TD Bank economist Dina Petramala said although goods exports are on track to record a 12 per cent annualized gain in the fourth quarter of 2009, she still expects Canada to stay in a trade deficit for most of this year.
She said weak U.S. demand for Canadian exports and the high dollar points to another year of struggle for the export sector. About 75 per cent of Canada's exports head to the U.S.
As well, a strong dollar has the effect of making imports more attractive to Canadians, further exacerbating the trade deficit.
In November, exports increased to $31.6 billion benefiting on the higher price of oil - the fifth increase in six months - as prices rose 1.1 per cent.
But in volume terms, exports actually slipped 0.1 per cent. And excluding energy products, exports fell 0.3 per cent.
Meanwhile, imports to Canada increased by $1.2 billion to $31.9 billion, almost offsetting the declines of the previous three months.
Most import sectors posted gains, with automotive products, machinery and equipment, and energy products accounting for the bulk of November's increase.
The exception was industrial goods and materials.
Exports to the United States rose two per cent while imports, which increased 3.8 per cent, accounted for almost two-thirds of the gain in overall imports.
As a result, Canada's trade surplus with the United States narrowed to $3.2 billion in November from $3.5 billion in October.
Exports to countries other than the United States fell 1.2 per cent while imports from these countries increased four per cent.
Consequently, Canada's trade deficit with countries other than the United States widened to $3.6 billion in November from $3 billion in October.
China takes new steps to curb bank lending
By Joe McDonald
BEIJING — China took new steps Tuesday to control bank lending, ordering institutions to set aside more reserves in a move to avert a surge in credit that Beijing worries might fuel inflation or asset price bubbles.
China’s nascent rebound from the global crisis was fuelled by a flood of lending by state-owned banks last year. Bankers cut lending under government orders toward the end of 2009 but regulators worry credit might rebound this year.
The move indicates Beijing is confident growth can be sustained and has shifted focus to preventing financial excesses and economic overheating. The government is forecasting growth of 8.3 per cent for 2009, up from a low of 6.1 per cent for the first quarter of the year.
The central bank raised the amount of reserves that banks must hold by 0.5 per cent to 15 per cent of their deposits. Also Tuesday, the bank raised interest rates paid on one-year bills for the first time since August to absorb money from the market and cool credit growth.
“This series of moves by the central bank provides a clear sign that policy-makers are following through on their pledge to guide credit in order to pre-empt rising inflation and avoid asset price bubbles,” said Jing Ulrich, chair of China equities for J.P. Morgan, in a report.
Chinese stock and real estate prices soared last year, driven in part by stimulus money being diverted to speculation. The central bank governor and others have called for measures to prevent a dangerous boom and bust in asset prices, warning that could hurt the economy and banks that are left with unpaid loans.
Beijing also is trying to curb an inflow of foreign “hot money” that is coming into China to speculate in stocks and real estate.
Chinese banks lent 8.95 trillion yuan ($1.3 trillion) in January-October, up from a total of 4.2 trillion yuan for all of 2008. Much of that was in the first half of the year and lending fell sharply after July, when regulators tightened regulations on loans to buy second homes and ordered banks to scrutinize borrowers more closely.
The recent measures appear to be aimed at preventing a return to the torrid lending of early 2009. Despite the lending curbs, Chinese leaders have repeatedly assured the public that stimulus spending would continue in 2010. They say the government will pay special attention to entrepreneurs who missed out on aid in the first year of the stimulus.
The spending has sent housing prices soaring in Beijing and Shanghai since late 2008. Prices have roughly doubled over the past three years to more than 12,000 yuan ($1,700) per square meter, according to a December report by the U.S. bond manager Pimco.
Neighbouring Russia is suffering from the opposite problem.
Lending there is weak because banks are afraid of incurring bad loans, the chair of its central bank, Sergei Ignatyev, told parliament last month. He said corporate lending is flat, and retail lending is declining.
The politically sensitive prices of food and consumer goods also are edging up. After nine months of decline, consumer prices rose 0.6 per cent in November from a year earlier.
The bank reserve rate now stands at 15 per cent, its highest level since Dec. 5, according to the Chinese financial data website Hexun.com.
Rural credit cooperatives were exempt from the increase to make sure they can lend enough for spring planting, the central bank said. Their reserve rate was left at 13.5 per cent, according to Hexun.com.
The boost in the interest rate on the one-year bill was the first since August. The central bank had raised the rate for its three-month bills on Thursday.
The increase in the reserve rate was announced after Chinese stock markets closed.
The country’s benchmark Shanghai Composite Index closed up 1.9 per cent, or 61.22 points, at 3,273.97 on Tuesday. The index was one of the world’s best performers in 2009, ending the year up 80 per cent after heavy stimulus spendin
• DOW -36.73
• Dollar -.24c to 96.22cUS
• Oil -$1.73to $80.79US per barrel. the Chinese action to curtail economic growth put pressure on commodity prices because of concerns about a possible slowing of demand.
• Gold -$21.80 to $1,128.90USD per ounce
Canada falls back into trade deficit as dollar, low demand stalls exports
JULIAN BELTRAME, THE CANADIAN PRESS
THE CANADIAN PRESS, 2010
OTTAWA - Canada was pulled back into a trade deficit in November as the country faced twin headwinds of both a strong loonie and weaker demand for exports, after a surprisingly strong performance the previous month.
The value of exports from Canada rose 1.1 per cent from October, but imports jumped 3.9 per cent, producing a deficit of $344 million. In October, saw Canada posted its first trade surplus in months at $503 million.
In terms of volume, exports fell a disappointing 0.1 per cent in November, Statistics Canada reported.
Economists say with the loonie worth nearly as much as the American dollar, and potentially reaching parity within the year, the prospects for 2010 remain bleak for Canadian exporters.
"Don't look for a quick return to the halcyon days of big surpluses any time soon with domestic demand reviving faster than U.S. spending, and the Canadian dollar remaining lofty," BMO Capital Markets economist Douglas Porter wrote in an analysis of the trade data.
On Monday, Prime Minister Stephen Harper blamed soft international demand and the strong loonie for the weakness in Canada's manufacturing sector and slow jobs recovery.
But Export Development Canada offered some modest hope Tuesday, saying its semi-annual trade confidence index rose to 77.4 in the fall of 2009 from 68.5 during the spring.
"Trade is definitely in a growth mode, but we can't forget the starting point," said EDC chief economist Peter Hall. "Canadian exports took a 20 per cent hit in 2009, six times greater than any annual decline in recent memory. What exporters are saying is that they expect to start climbing out of that chasm."
And Hall believes exporters will be getting a break from the currency in the latter half of this year, although many other analysts see the loonie remaining near or above par with the U.S. dollar for most of 2010.
"We think the drivers of the currency are out of whack with reality," Hall explained. "Base metal prices seem a little too high and oil prices now are more indicative of an economy that is fully recovered than it actually is." Hall says he believes the Canadian dollar will slump to about 86 cents US in the second half of 2010, about 10 cents US lower than its current level.
Still, economists are not looking for a quick turnaround in Canada's trade performance.
TD Bank economist Dina Petramala said although goods exports are on track to record a 12 per cent annualized gain in the fourth quarter of 2009, she still expects Canada to stay in a trade deficit for most of this year.
She said weak U.S. demand for Canadian exports and the high dollar points to another year of struggle for the export sector. About 75 per cent of Canada's exports head to the U.S.
As well, a strong dollar has the effect of making imports more attractive to Canadians, further exacerbating the trade deficit.
In November, exports increased to $31.6 billion benefiting on the higher price of oil - the fifth increase in six months - as prices rose 1.1 per cent.
But in volume terms, exports actually slipped 0.1 per cent. And excluding energy products, exports fell 0.3 per cent.
Meanwhile, imports to Canada increased by $1.2 billion to $31.9 billion, almost offsetting the declines of the previous three months.
Most import sectors posted gains, with automotive products, machinery and equipment, and energy products accounting for the bulk of November's increase.
The exception was industrial goods and materials.
Exports to the United States rose two per cent while imports, which increased 3.8 per cent, accounted for almost two-thirds of the gain in overall imports.
As a result, Canada's trade surplus with the United States narrowed to $3.2 billion in November from $3.5 billion in October.
Exports to countries other than the United States fell 1.2 per cent while imports from these countries increased four per cent.
Consequently, Canada's trade deficit with countries other than the United States widened to $3.6 billion in November from $3 billion in October.
China takes new steps to curb bank lending
By Joe McDonald
BEIJING — China took new steps Tuesday to control bank lending, ordering institutions to set aside more reserves in a move to avert a surge in credit that Beijing worries might fuel inflation or asset price bubbles.
China’s nascent rebound from the global crisis was fuelled by a flood of lending by state-owned banks last year. Bankers cut lending under government orders toward the end of 2009 but regulators worry credit might rebound this year.
The move indicates Beijing is confident growth can be sustained and has shifted focus to preventing financial excesses and economic overheating. The government is forecasting growth of 8.3 per cent for 2009, up from a low of 6.1 per cent for the first quarter of the year.
The central bank raised the amount of reserves that banks must hold by 0.5 per cent to 15 per cent of their deposits. Also Tuesday, the bank raised interest rates paid on one-year bills for the first time since August to absorb money from the market and cool credit growth.
“This series of moves by the central bank provides a clear sign that policy-makers are following through on their pledge to guide credit in order to pre-empt rising inflation and avoid asset price bubbles,” said Jing Ulrich, chair of China equities for J.P. Morgan, in a report.
Chinese stock and real estate prices soared last year, driven in part by stimulus money being diverted to speculation. The central bank governor and others have called for measures to prevent a dangerous boom and bust in asset prices, warning that could hurt the economy and banks that are left with unpaid loans.
Beijing also is trying to curb an inflow of foreign “hot money” that is coming into China to speculate in stocks and real estate.
Chinese banks lent 8.95 trillion yuan ($1.3 trillion) in January-October, up from a total of 4.2 trillion yuan for all of 2008. Much of that was in the first half of the year and lending fell sharply after July, when regulators tightened regulations on loans to buy second homes and ordered banks to scrutinize borrowers more closely.
The recent measures appear to be aimed at preventing a return to the torrid lending of early 2009. Despite the lending curbs, Chinese leaders have repeatedly assured the public that stimulus spending would continue in 2010. They say the government will pay special attention to entrepreneurs who missed out on aid in the first year of the stimulus.
The spending has sent housing prices soaring in Beijing and Shanghai since late 2008. Prices have roughly doubled over the past three years to more than 12,000 yuan ($1,700) per square meter, according to a December report by the U.S. bond manager Pimco.
Neighbouring Russia is suffering from the opposite problem.
Lending there is weak because banks are afraid of incurring bad loans, the chair of its central bank, Sergei Ignatyev, told parliament last month. He said corporate lending is flat, and retail lending is declining.
The politically sensitive prices of food and consumer goods also are edging up. After nine months of decline, consumer prices rose 0.6 per cent in November from a year earlier.
The bank reserve rate now stands at 15 per cent, its highest level since Dec. 5, according to the Chinese financial data website Hexun.com.
Rural credit cooperatives were exempt from the increase to make sure they can lend enough for spring planting, the central bank said. Their reserve rate was left at 13.5 per cent, according to Hexun.com.
The boost in the interest rate on the one-year bill was the first since August. The central bank had raised the rate for its three-month bills on Thursday.
The increase in the reserve rate was announced after Chinese stock markets closed.
The country’s benchmark Shanghai Composite Index closed up 1.9 per cent, or 61.22 points, at 3,273.97 on Tuesday. The index was one of the world’s best performers in 2009, ending the year up 80 per cent after heavy stimulus spendin
Tuesday, January 12, 2010
Financial Update For Jan. 12, 2010
• TSX -6.70
• DOW +45.80
• Dollar -.24c to 96.76cUS
• Oil -$.23to $82.52US per barrel.
• Gold +$12.50 to $1,150.70USD per ounce
How your mortgage can set you free of other debt
by Michelle Warren, Bankrate.com
Wednesday, January 6, 2010provided by
Credit crunch, debt crisis — call it what you will, but the current economic climate is spurring people to get their own finances in order. For Jack and Sarah Stewart, of Toronto, this means tackling the $40,000 in debt they've allowed to balloon during the past eight years. With their mortgage coming up for renewal, they're thinking of clearing the slate and rolling the burden into their mortgage.
"We want to consolidate our debt, but we're not sure if increasing our mortgage is the best way to do it," says Jack, who asked that his and his wife's names be changed to protect their privacy.
He's not alone. Laurie Campbell, executive director of Credit Canada, says it's a question people grapple with all the time. "Homes in the past have been your sacred cow," she says, referring to the drive to pay down one's mortgage as quickly as possible.
These days, however, with people juggling debts and paying varying rates of interest, increasing one's mortgage can be a smart move, even if it takes longer to pay off.
Lowering interest rates
Peter Majthenyi, a mortgage planner with Mortgage Architects, in Toronto, says it's a common theme as homeowners strive to bring down the overall interest they pay, as well as reduce their monthly obligations. He prefers to think of it as repositioning one's debt, and in his experience, "in almost all cases, it's justified."
"If you have debt that is sitting at 18 percent interest, then it certainly makes sense," says Campbell, adding that it's something to consider only if you have enough equity in your home and if your mortgage is coming up for renewal (read the fine print to find out if the penalties for breaking a mortgage outweigh the possible benefits).
Majthenyi notes that if you're working with the same lender, there's often no penalty involved with increasing your mortgage before the term expires.
The Stewarts seem like prime candidates. They have a $200,000 mortgage on a house worth about $425,000. They have plenty of equity, they're up for renewal at the end of the year and they say they're serious about getting their finances in order. Ideally, they'd roll the debt into their mortgage, continue an accelerated payment program whereby they pay every two weeks and they would not increase their amortization period, but instead increase their payments.
Dealing with debt
It's a good plan, says Campbell, who thinks all mortgage holders should accelerate their payments. She also likes the idea that they plan to stick to a 17-year amortization instead of renegotiating another 25-year mortgage. However, she stresses that none of this amounts to much if the Stewarts are going to continue the same spending habits and find themselves in a similar position five years from now. "They have to understand what got them into this $40,000 debt in the first place. They have to make sure they don't fall victim to that again."
She recommends cutting up credit cards, especially store cards, which have higher rates of interest, and not using one's line of credit like a bank account.
The Stewarts say the bulk of their debt was incurred for renovation costs, including a new kitchen and installing hardwood flooring, but admit their spending habits need a makeover. "We're always dipping in to our line of credit because we're strapped for cash," says Sarah Stewart. "I think if we consolidate the debt, it'll increase our cash flow and we'll be able to live within our means."
Jeanette Brox, a Certified Financial Planner with Investors Group in North York, Ont., always encourages her clients to look at the big picture when it comes to financial health: "My job is to make them think outside the box." She says helping people manage debt, while securing their future, is essential. "People need to think beyond what our parents did, which was paying down the mortgage," she says. "I used to think that way too, but I don't anymore."
In her view, the Stewarts and others like them need to take an aggressive approach if they ever want to get ahead. Not only do they need to improve cash flow, but they also need an emergency fund for unforeseen expenses, not to mention a retirement plan.
Planning for the future
Brox admits a lot of people would balk at the idea, but she thinks the Stewarts, both in their early 30s, should not only roll their debt into the mortgage, but increase their mortgage an additional $35,000 for a total of $275,000. To make payments more manageable, she'd also recommend increasing the amortization period to 25 years. She would invest $25,000 in mutual funds and further $10,000 in a money market account (earning about two percent interest).
"This is what I call a lifestyle fund," says Brox, adding that part of the interest cost on the mortgage would be tax deductible. "It's a win-win situation, but you've got to be really disciplined."
That means using their increased tax return to pay down the principal on the mortgage, thereby helping compensate for the interest cost of carrying the additional $35,000. The other bonus is that within five years (or so), the $25,000 registered retirement savings plan, or RRSP, will have grown to about $40,000. She stresses this is a long-term plan and people have to realize that the market is going to rise and fall.
"It's all based on comfort level," says Brox, adding that the biggest mistake she sees with people who reposition debt is that they don't have a long-term plan and, as Campbell, pointed out, go back to old spending habits. "People need to have their whole financial picture analyzed. It's something to consider, but you need to work with a planner or bank manager."
Lines of credit
There's a whole school of thinkers that shudder at the thought of increasing one's mortgage. At the core of this is that you're trading unsecured debt for secured debt and paying interest on that debt for the entire life of your mortgage, which can dramatically increase the cost of borrowing. In addition, refinancing also involves added legal costs (in most cases a minimum of $500). An alternative is consolidating debt onto a line of credit or home equity loan, which have higher interest rates than a mortgage, but can be paid off more quickly.
This works in theory, say our experts, but rarely in real life. "A lot of people just make the minimum payment and never get it cleaned up," says Brox.
"I'm wary of open lines of credit because they can easily stay at $50,000 forever," says Campbell, adding that an increased mortgage payment forces people to be more disciplined in paying down debt.
As for paying the debt for the entire length of your mortgage, all the experts stress that the way to combat this is by channelling extra funds back into the mortgage and paying off the mortgage early. This could mean accelerated payments, using tax returns or bumping up the payments. "We're putting all the money back into the principal of the mortgage," says Majthenyi, who points out that an extra $10,000 on a mortgage costs about $50 a month, while a $10,000 loan requires minimum payments of $300.
In the Stewart's case, it's costing them about $1,000 a month to cover $40,000 debt. If it's part of their mortgage, it translates into about $200. Ideally they'd direct the bulk of that money back into their mortgage through an annual lump payment or by increasing individual payments by a few hundred dollars.
Repositioning debt into one's mortgage is a sound option for people who are committed to changing bad habits and/or taking a long-term approach to getting their finances in order.
When it comes to money, Brox says that people need a big-picture plan, not a band-aid solution: "A lot of times it's not what you make but how you manage it."
• DOW +45.80
• Dollar -.24c to 96.76cUS
• Oil -$.23to $82.52US per barrel.
• Gold +$12.50 to $1,150.70USD per ounce
How your mortgage can set you free of other debt
by Michelle Warren, Bankrate.com
Wednesday, January 6, 2010provided by
Credit crunch, debt crisis — call it what you will, but the current economic climate is spurring people to get their own finances in order. For Jack and Sarah Stewart, of Toronto, this means tackling the $40,000 in debt they've allowed to balloon during the past eight years. With their mortgage coming up for renewal, they're thinking of clearing the slate and rolling the burden into their mortgage.
"We want to consolidate our debt, but we're not sure if increasing our mortgage is the best way to do it," says Jack, who asked that his and his wife's names be changed to protect their privacy.
He's not alone. Laurie Campbell, executive director of Credit Canada, says it's a question people grapple with all the time. "Homes in the past have been your sacred cow," she says, referring to the drive to pay down one's mortgage as quickly as possible.
These days, however, with people juggling debts and paying varying rates of interest, increasing one's mortgage can be a smart move, even if it takes longer to pay off.
Lowering interest rates
Peter Majthenyi, a mortgage planner with Mortgage Architects, in Toronto, says it's a common theme as homeowners strive to bring down the overall interest they pay, as well as reduce their monthly obligations. He prefers to think of it as repositioning one's debt, and in his experience, "in almost all cases, it's justified."
"If you have debt that is sitting at 18 percent interest, then it certainly makes sense," says Campbell, adding that it's something to consider only if you have enough equity in your home and if your mortgage is coming up for renewal (read the fine print to find out if the penalties for breaking a mortgage outweigh the possible benefits).
Majthenyi notes that if you're working with the same lender, there's often no penalty involved with increasing your mortgage before the term expires.
The Stewarts seem like prime candidates. They have a $200,000 mortgage on a house worth about $425,000. They have plenty of equity, they're up for renewal at the end of the year and they say they're serious about getting their finances in order. Ideally, they'd roll the debt into their mortgage, continue an accelerated payment program whereby they pay every two weeks and they would not increase their amortization period, but instead increase their payments.
Dealing with debt
It's a good plan, says Campbell, who thinks all mortgage holders should accelerate their payments. She also likes the idea that they plan to stick to a 17-year amortization instead of renegotiating another 25-year mortgage. However, she stresses that none of this amounts to much if the Stewarts are going to continue the same spending habits and find themselves in a similar position five years from now. "They have to understand what got them into this $40,000 debt in the first place. They have to make sure they don't fall victim to that again."
She recommends cutting up credit cards, especially store cards, which have higher rates of interest, and not using one's line of credit like a bank account.
The Stewarts say the bulk of their debt was incurred for renovation costs, including a new kitchen and installing hardwood flooring, but admit their spending habits need a makeover. "We're always dipping in to our line of credit because we're strapped for cash," says Sarah Stewart. "I think if we consolidate the debt, it'll increase our cash flow and we'll be able to live within our means."
Jeanette Brox, a Certified Financial Planner with Investors Group in North York, Ont., always encourages her clients to look at the big picture when it comes to financial health: "My job is to make them think outside the box." She says helping people manage debt, while securing their future, is essential. "People need to think beyond what our parents did, which was paying down the mortgage," she says. "I used to think that way too, but I don't anymore."
In her view, the Stewarts and others like them need to take an aggressive approach if they ever want to get ahead. Not only do they need to improve cash flow, but they also need an emergency fund for unforeseen expenses, not to mention a retirement plan.
Planning for the future
Brox admits a lot of people would balk at the idea, but she thinks the Stewarts, both in their early 30s, should not only roll their debt into the mortgage, but increase their mortgage an additional $35,000 for a total of $275,000. To make payments more manageable, she'd also recommend increasing the amortization period to 25 years. She would invest $25,000 in mutual funds and further $10,000 in a money market account (earning about two percent interest).
"This is what I call a lifestyle fund," says Brox, adding that part of the interest cost on the mortgage would be tax deductible. "It's a win-win situation, but you've got to be really disciplined."
That means using their increased tax return to pay down the principal on the mortgage, thereby helping compensate for the interest cost of carrying the additional $35,000. The other bonus is that within five years (or so), the $25,000 registered retirement savings plan, or RRSP, will have grown to about $40,000. She stresses this is a long-term plan and people have to realize that the market is going to rise and fall.
"It's all based on comfort level," says Brox, adding that the biggest mistake she sees with people who reposition debt is that they don't have a long-term plan and, as Campbell, pointed out, go back to old spending habits. "People need to have their whole financial picture analyzed. It's something to consider, but you need to work with a planner or bank manager."
Lines of credit
There's a whole school of thinkers that shudder at the thought of increasing one's mortgage. At the core of this is that you're trading unsecured debt for secured debt and paying interest on that debt for the entire life of your mortgage, which can dramatically increase the cost of borrowing. In addition, refinancing also involves added legal costs (in most cases a minimum of $500). An alternative is consolidating debt onto a line of credit or home equity loan, which have higher interest rates than a mortgage, but can be paid off more quickly.
This works in theory, say our experts, but rarely in real life. "A lot of people just make the minimum payment and never get it cleaned up," says Brox.
"I'm wary of open lines of credit because they can easily stay at $50,000 forever," says Campbell, adding that an increased mortgage payment forces people to be more disciplined in paying down debt.
As for paying the debt for the entire length of your mortgage, all the experts stress that the way to combat this is by channelling extra funds back into the mortgage and paying off the mortgage early. This could mean accelerated payments, using tax returns or bumping up the payments. "We're putting all the money back into the principal of the mortgage," says Majthenyi, who points out that an extra $10,000 on a mortgage costs about $50 a month, while a $10,000 loan requires minimum payments of $300.
In the Stewart's case, it's costing them about $1,000 a month to cover $40,000 debt. If it's part of their mortgage, it translates into about $200. Ideally they'd direct the bulk of that money back into their mortgage through an annual lump payment or by increasing individual payments by a few hundred dollars.
Repositioning debt into one's mortgage is a sound option for people who are committed to changing bad habits and/or taking a long-term approach to getting their finances in order.
When it comes to money, Brox says that people need a big-picture plan, not a band-aid solution: "A lot of times it's not what you make but how you manage it."
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