U.S. Trade deficit climbs to 15-month high in March A trade deficit is when the total value of imports is greater than the total value of exports, a surplus is when the total value of exports exceeds the total value of imports.
The higher deficit is evidence of an improving economy. It shows demand is picking up in the United States following the recession, which had cut the trade gap last year to the lowest level in eight years
So far so good on Greek bailout, but dark legacy of recession becoming clearer former Bank of Canada governor David Dodge, warned that the crisis should be considered a “wake-up call” to other countries, including the United States and the United Kingdom, to get their fiscal houses in order.
U.S. Bank Regulations Miss the Point
• TSX +195.47 Europe’s trillion-dollar debt solution held for a second day as global shares rose after Spain outlined measures to cut its deficit, allaying fears about Greek debt crisis contagion.
• DOW +148.65
• Dollar +.19c to 98.06cUS climbed for a fourth straight session, boosted by rallying equities and easing fears that sovereign debt problems could spread in the euro zone.
• Oil -.72 to $75.65US per barrel. dropped after government data showed rising U.S. inventories.
• Gold +$22.80 to $1,242.70 USD per ounce Safe-haven buying pushed gold prices to another new record high as traders pondered if the $1-trillion U.S. loan package would suffice to ensure long-term financial stability in the euro-zone.
• http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us
So far so good on Greek bailout, but dark legacy of recession becoming clearer
BY JULIAN BELTRAME
OTTAWA — Europe’s trillion-dollar debt solution held for a second day Tuesday as global stock markets and currencies headed back nearer to levels they enjoyed prior to last week’s steep selloff.
The Toronto market was up after big rebounds on Monday. Meanwhile, the Canadian dollar rose past 98 cents US, a signal that markets judged that global risk was diminishing.
But it appeared that investors as well as governments were keeping their fingers crossed, given the growing realization that the eurozone rescue package hammered out on the weekend may only delay the day of financial reckoning. Gold, a traditional safe haven destination for nervous money, rose to a record high close.
The New York Times quoted a prominent equity analyst as describing the mood on Wall Street as a “wall of worry” over sovereign debt, China and other uncertainties.
The market monitoring group of the Institute of International Finance, co-chaired by former Bank of Canada governor David Dodge, warned that the crisis should be considered a “wake-up call” to other countries, including the United States and the United Kingdom, to get their fiscal houses in order.
In the short term, the backstop agreement did appear to assure holders of Greek treasury bonds they will get their money on maturity next week, and gave the country a window to make some additional borrowings at non-crippling rates.
But what happens next? And what might happen to the $1-trillion in pledged support if the rest of the so-called PIIGS (Portugal, Italy, Ireland, Spain and Greece) need help to finance their debt.
“We fear that as the market gives this announcement . . . more than a few hours of scrutiny and assessment, the day after the day after may not play out as nicely as the day before it,” said Carl Weinberg of U.S.-based High Frequency Economics.
Although North America’s exposure is indirect, even Canada stands to lose from the fallout.
The TD Bank’s deputy chief economist, Craig Alexander, says Canada’s economy would take a significant hit — just like it did in 2008 — if government debt worries lead to a second financial market crisis. Even if the problem is somewhat contained, Canadian economic growth will be slowed by Europe’s debt problems, he said.
A slowdown in the European economy — the world’s biggest — would cut demand for Canadian exports to Europe of everything from machinery and manufactured goods to food products, grain, fertilizers and chemicals. But Europe represents only about 10 per cent of Canadian exports, so the impact would be relatively minor.
A debt default would also cause financial losses to any Canadian bank or companies holding European bonds, but again the exposure appears to be minor.
The real danger, says Alexander, is if a debt default or debt restructuring leads to the failure of one or more major European banks, it could cause a knock-on effect that causes international credit markets to seize up as occurred in the fall of 2008 following the collapse of Lehman Brothers.
“We saw the real impact of that. You saw export financing dry up and exports shipments plunge globally. That’s the worst case scenario for Canada,” he said.
Given that about one third of Canada’s economy is based on exports, the country fell into a recession lasting almost a year with the loss of over 400,000 jobs as a result of the recession after the Lehman collapse.
Even under the best case scenario — that European countries and the United States manage to put in place the austerity measures needed to assure markets their debts can be managed — the result would be slower global growth, which would still affect Canada’s export sector to some degree.
By one calculation, modest austerity measures in Europe would slice about one per cent of gross domestic product from the continent’s already weak growth prospects, with some Mediterranean countries plunged back into recession.
The irony is that Canada would also suffer even though it has done most things right, says David Rosenberg, chief economist with Toronto-based Gluskin Sheff. “Being a small, open economy sensitive to commodity prices, this is one of the many times when sudden shifts in global economic sentiment can hit us disproportionately,” he said.
Alexander still believes a double-dip recession remains an outside risk, but adds it can no longer be dismissed as easily as it was a few months ago.
Canada’s economy grew by a surprisingly strong five per cent in the last three months of 2009, and judging by the 109,000 new jobs added in April, it is still advancing strongly. But now it is expected to slow considerably in the second half of the year.
“The good news is we got out of the recession; the bad news is we have the legacy of late 2008-2009 to deal with and those legacies are enormous,” Alexander said.“I’m worried (that) if the U.S. economy slows down and the global economy moderates, once again the export sector is challenged, and we’re going go through this at the same time the dollar is strong. I think the expectations for strong economic growth going forward needs to be tempered.”
For Europe, the repercussions from letting government debt cross over to the unmanageable column could restrain growth for a decade, he said. http://news.therecord.com/Business/article/710277 SPECIAL FEATURES
U.S. Trade deficit climbs to 15-month high in March
BY MARTIN CRUTSINGER The Associated Press
WASHINGTON — The U.S. trade deficit rose to a 15-month high as rising oil prices pushed crude oil imports to the highest level since the fall of 2008, offsetting another strong gain in exports. The larger deficit is evidence of a rebounding U.S. economy.
The Commerce Department said Wednesday that the trade deficit rose 2.5 per cent to $40.4 billion in March. It was close to the $40.1 billion deficit economists had expected and the biggest monthly trade deficit since December 2008.
Exports of goods and services rose 3.2 per cent to $147.87 billion, the highest level since October 2008. Imports were up 3.1 per cent to $188.3 billion.
The higher deficit is evidence of an improving economy. It shows demand is picking up in the United States following the recession, which had cut the trade gap last year to the lowest level in eight years.
Economists believe U.S. manufacturers will continue to get a boost from rising demand for their products, reflecting the rebound in the global economy and a weaker dollar against many major currencies. However, that forecast could turn out to be too optimistic if a widening European debt crisis cuts into demand for American products in Europe, a major market for U.S. goods.
So far this year, the deficit is running at an annual rate of $467.2 billion, 23.4 per cent higher than last year’s imbalance of $378.6 billion.
For March, the rise in exports reflected increased sales of American farm products and a wide range of heavy machinery from electric generators to earthmoving equipment.
The increase in imports was led by a 25.5 per cent jump in crude oil shipments, which rose to $22.3 billion March, the highest level since October 2008. That increase reflected higher volume and higher prices. The average price for a barrel of crude oil rose to $74.32, up from $72.92 in February.
Prices have been falling since oil hit $87.15 a barrel in early May. The debt crisis in Europe has raised concerns about the durability of the global economic recovery. In trading Wednesday, oil dipped to near $76 per barrel.
The deficit with China rose 2.4 per cent to $16.9 billion in March, the highest level since January and the largest trade gap with any country. The Obama administration is facing growing political pressure to impose trade sanctions on China if Beijing doesn’t allow its currency to rise in value against the dollar.
Treasury Secretary Timothy Geithner raised hopes for a change in monetary policy when he stopped in Beijing last month to talk with Chinese economic officials on his way back from India. But Chinese President Hu Jintao, who discussed the issue with President Barack Obama during a trip to Washington last month, said China’s decision on the currency “won’t be advanced by any foreign pressure.”
American manufacturers are pressing for a tougher trade policy. They say America’s trade deficit with China has cost 2.4 million manufacturing jobs at a time when the jobless rate in this country is 9.9 per cent.
Geithner is expected to raise the currency issue when he and Secretary of State Hillary Clinton go to China for two days of high-level talks later this month.
The deficit with the 27-nation European Union rose to $7.1 billion in March, a jump of 32.7 per cent. Imports from Europe rose faster than U.S. exports to the EU.
The deficit with Canada, America’s largest trading partner, fell by 15.8 per cent to $2.3 billion. The imbalance with Mexico rose 26.7 per cent to $6 billion as imports from Mexico hit an all-time high. http://news.therecord.com/Business/article/710990
Thursday, May 13, 2010
Wednesday, May 12, 2010
Financial Update For May 12, 2010
• TSX +52.71 to 12,000
• DOW -36.88
• Dollar +.24c to 97.87cUS
• Oil -.43 to $76.37US per barrel.
• Gold +$19.50 to $1,219.90 USD per ounce Safe-haven buying pushed gold prices to a new record high as traders pondered if the $1-trillion U.S. loan package would suffice to ensure long-term financial stability in the euro-zone.
Even recession didn't slow down Canadian's spending, report finds
By Julian Beltrame, The Canadian Press
OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians' appetite for spending money they don't have.
A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.
That's $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.
"This report is another indication of Canadians' readiness to consume today and pay later," says association president Anthony Ariganello.
"The concern is do they understand the full cost of paying later?"
The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.
Most Canadians don't yet share that concern. The accountants' survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.
But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.
The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.
The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.
The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.
The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.
Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.
BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada's decision to slash rates to historic lows during the recession.
"That's why we did not experience a great recession," he noted. "That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem."
But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.
Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike. http://ca.news.finance.yahoo.com/s/11052010/2/biz-finance-recession-didn-t-slow-canadian-s-spending-report.html
Feds want tighter rules to ground fly-by-night movers
• By Dean Beeby, The Canadian Press
OTTAWA - The federal government is putting the moves on movers.
Industry Canada wants to tighten the rules for moving companies after a deluge of complaints from consumers who say they've been ripped off by crooked operators.
Armed with a cellphone and a Kijiji or Craigslist ad on the Internet, scam artists are preying on Canadians looking for cheap moving help, says the department.
"Complaints include holding furniture hostage at the destination until consumers pay more than the original estimate and producing new hidden costs such as packaging," says an internal document.
"In some cases, the belongings are not delivered but are dumped or remain in warehouses and storage facilities. Consumers in this market are particularly vulnerable to such practices because of the ability of movers to confiscate or ransom their belongings."
The Consumer Measures Committee, a federal-provincial group run by Industry Canada, launched a project last July to better monitor the household moving sector by analyzing consumer complaints.
"This work is in the very early stages of development and findings are not yet available," department spokesman Michael Hammond said.
Regulation of the moving sector is largely a provincial responsibility, even though some moves cross provincial boundaries. Eight provinces have highway traffic legislation that governs the household-goods moving trade, with Prince Edward Island and Newfoundland and Labrador the exceptions.
Many provinces also have consumer protection laws, as does the federal government.
But industry players contacted by the committee in the last few months say officials want to end that patchwork coverage by harmonizing laws, regulations and practices across the country.
The 2006 census of Canada found that 1.2 million households had moved in the last five years. Some estimates say Canadians change addresses an average of 13 times through their lifetimes.
And the Canadian Council of Better Business Bureaus says complaints about movers were No. 7 on its Top 10 list of consumer beefs in 2009. Just over half of the 636 formal complaints about moving firms last year were settled.
An Industry Canada briefing note, obtained under the Access to Information Act, suggests about one of every four moves generates a consumer complaint.
The head of Canada's largest industry group, the Canadian Association of Movers, supports harmonization but says the best protection for consumers is education.
"You have people having all their life possessions destroyed, stolen, rifled through, held for ransom, overcharged," president John Levi said in an interview from the group's Mississauga, Ont., headquarters.
But even with tougher regulations "there's no government agency out there that can help you in a timely fashion."
Consumers are understandably intimidated by large men suddenly demanding more cash before unloading the truck, Levi said.
"There's sufficient legislation and regulation in place — if it were enforced."
The best defence is to do some research, he said.
The mover's association — with about 200 members, including big operators like Atlas, Allied, Mayflower, United, North American — certifies its firms after checking their standards and reputations, and having them sign a code of ethics.
The Better Business Bureau as well as Industry Canada posts consumer checklists and advice on moving on their websites. A joint consumer tips release is also planned shortly by the movers' association and the business bureau.
Better Business Bureaus across Canada fielded almost 98,000 inquiries about moving companies last year, the second-most common query after consumer questions about roofing contractors.
http://ca.news.finance.yahoo.com/s/09052010/2/biz-finance-feds-want-tighter-rules-ground-fly-night-movers.html
• DOW -36.88
• Dollar +.24c to 97.87cUS
• Oil -.43 to $76.37US per barrel.
• Gold +$19.50 to $1,219.90 USD per ounce Safe-haven buying pushed gold prices to a new record high as traders pondered if the $1-trillion U.S. loan package would suffice to ensure long-term financial stability in the euro-zone.
Even recession didn't slow down Canadian's spending, report finds
By Julian Beltrame, The Canadian Press
OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians' appetite for spending money they don't have.
A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.
That's $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.
"This report is another indication of Canadians' readiness to consume today and pay later," says association president Anthony Ariganello.
"The concern is do they understand the full cost of paying later?"
The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.
Most Canadians don't yet share that concern. The accountants' survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.
But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.
The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.
The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.
The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.
The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.
Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.
BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada's decision to slash rates to historic lows during the recession.
"That's why we did not experience a great recession," he noted. "That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem."
But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.
Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike. http://ca.news.finance.yahoo.com/s/11052010/2/biz-finance-recession-didn-t-slow-canadian-s-spending-report.html
Feds want tighter rules to ground fly-by-night movers
• By Dean Beeby, The Canadian Press
OTTAWA - The federal government is putting the moves on movers.
Industry Canada wants to tighten the rules for moving companies after a deluge of complaints from consumers who say they've been ripped off by crooked operators.
Armed with a cellphone and a Kijiji or Craigslist ad on the Internet, scam artists are preying on Canadians looking for cheap moving help, says the department.
"Complaints include holding furniture hostage at the destination until consumers pay more than the original estimate and producing new hidden costs such as packaging," says an internal document.
"In some cases, the belongings are not delivered but are dumped or remain in warehouses and storage facilities. Consumers in this market are particularly vulnerable to such practices because of the ability of movers to confiscate or ransom their belongings."
The Consumer Measures Committee, a federal-provincial group run by Industry Canada, launched a project last July to better monitor the household moving sector by analyzing consumer complaints.
"This work is in the very early stages of development and findings are not yet available," department spokesman Michael Hammond said.
Regulation of the moving sector is largely a provincial responsibility, even though some moves cross provincial boundaries. Eight provinces have highway traffic legislation that governs the household-goods moving trade, with Prince Edward Island and Newfoundland and Labrador the exceptions.
Many provinces also have consumer protection laws, as does the federal government.
But industry players contacted by the committee in the last few months say officials want to end that patchwork coverage by harmonizing laws, regulations and practices across the country.
The 2006 census of Canada found that 1.2 million households had moved in the last five years. Some estimates say Canadians change addresses an average of 13 times through their lifetimes.
And the Canadian Council of Better Business Bureaus says complaints about movers were No. 7 on its Top 10 list of consumer beefs in 2009. Just over half of the 636 formal complaints about moving firms last year were settled.
An Industry Canada briefing note, obtained under the Access to Information Act, suggests about one of every four moves generates a consumer complaint.
The head of Canada's largest industry group, the Canadian Association of Movers, supports harmonization but says the best protection for consumers is education.
"You have people having all their life possessions destroyed, stolen, rifled through, held for ransom, overcharged," president John Levi said in an interview from the group's Mississauga, Ont., headquarters.
But even with tougher regulations "there's no government agency out there that can help you in a timely fashion."
Consumers are understandably intimidated by large men suddenly demanding more cash before unloading the truck, Levi said.
"There's sufficient legislation and regulation in place — if it were enforced."
The best defence is to do some research, he said.
The mover's association — with about 200 members, including big operators like Atlas, Allied, Mayflower, United, North American — certifies its firms after checking their standards and reputations, and having them sign a code of ethics.
The Better Business Bureau as well as Industry Canada posts consumer checklists and advice on moving on their websites. A joint consumer tips release is also planned shortly by the movers' association and the business bureau.
Better Business Bureaus across Canada fielded almost 98,000 inquiries about moving companies last year, the second-most common query after consumer questions about roofing contractors.
http://ca.news.finance.yahoo.com/s/09052010/2/biz-finance-feds-want-tighter-rules-ground-fly-night-movers.html
Tuesday, May 11, 2010
Financial Update For May 11, 2010
Time to lock in that mortgage rate?
• TSX +255.47 to 11,947 in a broad-based rally as investors were emboldened by a $1 trillion emergency rescue package out of Europe aimed at containing Greece's debt crisis
• DOW +404.71 to 10,785
• Dollar +1.83c to 97.63cUS
• Oil +1.69 to $76.80US per barrel. Energy producers were among the top gainers as the price of U.S. crude oil rallied more than 2 percent on the back of the aid plan.
• Gold -$9.60 to $1,200.40 USD per ounce as the better prospects for the European economy undercut safe haven buying of gold
Time to lock in that mortgage rate?
Andrew Allentuck, Financial Post Published: Thursday, May 06, 2010
Taking on a mortgage is a big commitment. Every buyer who uses a mortgage has the choice of floating or going with a fixed rate that often costs a couple of percentage points higher per year. Today, for example, one can get variable rates at an average rate of 2.34% while five year closed rates average 5.27%, according to Fiscal Agents Financial Services Group in Oakville, Ontario. Negotiated rates can be lower.
If rates never changed very much, there would be no contest – the floating rate deal would win. But rates do rise and fall and therein lies the borrower's dilemma.
Borrowers with kids and an aging car fear that their ability to pay interest rates twice or thrice the current floating rates are limited. "The test is liquidity and risk tolerance," says Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C. "People with ample liquidity can afford to take a chance on rising mortgage rates. It follows that those who lack liquidity feel some pressure to avoid drastic interest rate increases."
The point is not merely academic, for Canada, in spite of recent mortgage rate increases, is still at a relatively low point of rates over the last four decades. "There is more room for rates to go up than down," Moran points out.
The cost of making a decision to float or go fixed varies with the rate differences.
In 2008, Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, and Brandon Walker, a research associate at the Individual Finance and Insurance Decisions Centre in Toronto, published a study that measured the direct and opportunity costs of going with either choice. "Over the long run, homeowners really do pay extra for fixed rate mortgages," they concluded.
The reason is intuitive. Lenders do not want to take the chance that when they have to refinance a loan that they will be stuck paying more than they are getting.
Mismatching what they lend with the cost of what they borrow can cut their profits and even lead to insolvency. So lenders attach what amounts to an interest rate insurance fee and bundle that into the price of money they lend on fixed terms.
Milevsky and Walker confirmed this explanation. "The study showed that a positive Maturity Value of Savings [the value of investing the difference between floating and fixed mortgages in 91-day T-bills] was positive the majority of the time, so the homeowner saved by using a variable-rate mortgage."
The amount of money that the homeowner can save by taking a chance on floating rates varied in the Milevsky and Walker study, depending on the time periods in question. But the average amount was impressive: $20,630 as of 2008. Put another way, floating allowed borrowers to cut the time it would take to pay off the mortgages by a year or more, in some cases as much as five years on 15-year amortizations.
Rational calculation and personal feeling are, of course, different things. A person with a fixed income and a great deal of debt may be reluctant to put a rate casino between himself and the lender and will therefore go with certainty, even at a high price.
It is also a matter of experience. "First time buyers tend to pay close attention to the cost of the mortgage," says Laura Parsons, Areas Manager of Specialized Sales – which includes mortgages, for the BMO Financial Group in Calgary. For them, the appeal of locking in is relatively high. Their mortgages are new, the amounts they owe are higher than they would be 10 or 15 years in future when the mortgage is substantially reduced, and their incomes, often early in their adult lives, are lower than they will be in future.
"First time home buyers are net debtors and they don't want to endanger their finances," suggests Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver.
There are other strategies that the buyer can use to provide some rate insurance without taking on what Milevsky and Walker have demonstrated as the high cost of peace of mind.
"The buyer can take a variable rate mortgage but set payments higher than the minimum required" says Parsons. "That could be at the 5 year closed rate, which would mean a faster paydown and growing asset security while still keeping the low cost of the variable rate mortgage. Faster paydown is itself cost insurance if interest rates do rise."
Banks are nothing if not inventive in helping clients cope with the fixed versus floating dilemma. For example, TD Bank offers to give 5% of the amount borrowed on a five or six year fixed rate residential mortgage to the borrower. The program, aptly dubbed the "5% CashBack Mortgage," implicitly acknowledges that fixed rate loans can be more costly than variable rate ones.
For its part, RBC has a RateCapper Mortgage that builds on the initial low cost of a variable rate mortgage but limits the cost if rates shoot up. On a five year mortgage, the borrower will never pay more than the capped rate and if the variable rate, based on the prime rate, drops below the RateCapper mortgage maximum, the interest rate charged to the borrower also drops. The plan is a compromise and spreads interest rate risk. Many other lenders allow borrowers to mix fixed and variable rates, thus accomplishing a similar goal.
Plan selection, it turns out, is gender-related. According to a BMO survey, men, 44% of the time, are more likely than women to choose a fixed rate mortgage than women, who make that choice only 28% of the time. Women, it turns out, tend to make the better choice, for as BMO's analysis shows, "fixed rates were advantageous during only two periods – through the late 1970s and in the late 1980s, in both cases ahead of a period rising interest rates, as is the case now."
So where are interest rates headed? The yield curve, a line that links interest rates for periods of time from 1 day to 30 years, implies that rates will rise, but not very much.
There is no sense that we are returning to a period of double digit rates. Moreover, there are deflationary forces at work, notes Patricia Croft, chief economist of RBC Global Asset Management in Toronto. "The present crisis in European finance and the potential fizzling out of the present recovery in North American capital markets could presage falling inflation and even disinflation – the subsidence of rising prices and interest rates," she explains..
BMO forecasts that the rising Canadian dollar will put downward pressure on consumer prices, reflecting the fact that much of what Canadians eat and use is imported. Inflation could flare up, BMO's economists say, but there is a balanced risk of declining prices. For now, the Bank of Canada is being very cautious in its interest rate management commitments. For those who are strapped for cash, personal circumstance may dictate the choice of a fixed rate. But for everyone else, the folly of trying to make interest rate predictions over a business cycle and to predict both the short term rates and the long term rates along the yield curve should be apparent. No promises, of course, but the odds of saving money are with borrowers who choose variable rate plans or those that emulate them.
Read more: http://www.financialpost.com/personal-finance/mortgage-centre/story.html?id=2994048#ixzz0nWSeUpXO
• TSX +255.47 to 11,947 in a broad-based rally as investors were emboldened by a $1 trillion emergency rescue package out of Europe aimed at containing Greece's debt crisis
• DOW +404.71 to 10,785
• Dollar +1.83c to 97.63cUS
• Oil +1.69 to $76.80US per barrel. Energy producers were among the top gainers as the price of U.S. crude oil rallied more than 2 percent on the back of the aid plan.
• Gold -$9.60 to $1,200.40 USD per ounce as the better prospects for the European economy undercut safe haven buying of gold
Time to lock in that mortgage rate?
Andrew Allentuck, Financial Post Published: Thursday, May 06, 2010
Taking on a mortgage is a big commitment. Every buyer who uses a mortgage has the choice of floating or going with a fixed rate that often costs a couple of percentage points higher per year. Today, for example, one can get variable rates at an average rate of 2.34% while five year closed rates average 5.27%, according to Fiscal Agents Financial Services Group in Oakville, Ontario. Negotiated rates can be lower.
If rates never changed very much, there would be no contest – the floating rate deal would win. But rates do rise and fall and therein lies the borrower's dilemma.
Borrowers with kids and an aging car fear that their ability to pay interest rates twice or thrice the current floating rates are limited. "The test is liquidity and risk tolerance," says Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C. "People with ample liquidity can afford to take a chance on rising mortgage rates. It follows that those who lack liquidity feel some pressure to avoid drastic interest rate increases."
The point is not merely academic, for Canada, in spite of recent mortgage rate increases, is still at a relatively low point of rates over the last four decades. "There is more room for rates to go up than down," Moran points out.
The cost of making a decision to float or go fixed varies with the rate differences.
In 2008, Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, and Brandon Walker, a research associate at the Individual Finance and Insurance Decisions Centre in Toronto, published a study that measured the direct and opportunity costs of going with either choice. "Over the long run, homeowners really do pay extra for fixed rate mortgages," they concluded.
The reason is intuitive. Lenders do not want to take the chance that when they have to refinance a loan that they will be stuck paying more than they are getting.
Mismatching what they lend with the cost of what they borrow can cut their profits and even lead to insolvency. So lenders attach what amounts to an interest rate insurance fee and bundle that into the price of money they lend on fixed terms.
Milevsky and Walker confirmed this explanation. "The study showed that a positive Maturity Value of Savings [the value of investing the difference between floating and fixed mortgages in 91-day T-bills] was positive the majority of the time, so the homeowner saved by using a variable-rate mortgage."
The amount of money that the homeowner can save by taking a chance on floating rates varied in the Milevsky and Walker study, depending on the time periods in question. But the average amount was impressive: $20,630 as of 2008. Put another way, floating allowed borrowers to cut the time it would take to pay off the mortgages by a year or more, in some cases as much as five years on 15-year amortizations.
Rational calculation and personal feeling are, of course, different things. A person with a fixed income and a great deal of debt may be reluctant to put a rate casino between himself and the lender and will therefore go with certainty, even at a high price.
It is also a matter of experience. "First time buyers tend to pay close attention to the cost of the mortgage," says Laura Parsons, Areas Manager of Specialized Sales – which includes mortgages, for the BMO Financial Group in Calgary. For them, the appeal of locking in is relatively high. Their mortgages are new, the amounts they owe are higher than they would be 10 or 15 years in future when the mortgage is substantially reduced, and their incomes, often early in their adult lives, are lower than they will be in future.
"First time home buyers are net debtors and they don't want to endanger their finances," suggests Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver.
There are other strategies that the buyer can use to provide some rate insurance without taking on what Milevsky and Walker have demonstrated as the high cost of peace of mind.
"The buyer can take a variable rate mortgage but set payments higher than the minimum required" says Parsons. "That could be at the 5 year closed rate, which would mean a faster paydown and growing asset security while still keeping the low cost of the variable rate mortgage. Faster paydown is itself cost insurance if interest rates do rise."
Banks are nothing if not inventive in helping clients cope with the fixed versus floating dilemma. For example, TD Bank offers to give 5% of the amount borrowed on a five or six year fixed rate residential mortgage to the borrower. The program, aptly dubbed the "5% CashBack Mortgage," implicitly acknowledges that fixed rate loans can be more costly than variable rate ones.
For its part, RBC has a RateCapper Mortgage that builds on the initial low cost of a variable rate mortgage but limits the cost if rates shoot up. On a five year mortgage, the borrower will never pay more than the capped rate and if the variable rate, based on the prime rate, drops below the RateCapper mortgage maximum, the interest rate charged to the borrower also drops. The plan is a compromise and spreads interest rate risk. Many other lenders allow borrowers to mix fixed and variable rates, thus accomplishing a similar goal.
Plan selection, it turns out, is gender-related. According to a BMO survey, men, 44% of the time, are more likely than women to choose a fixed rate mortgage than women, who make that choice only 28% of the time. Women, it turns out, tend to make the better choice, for as BMO's analysis shows, "fixed rates were advantageous during only two periods – through the late 1970s and in the late 1980s, in both cases ahead of a period rising interest rates, as is the case now."
So where are interest rates headed? The yield curve, a line that links interest rates for periods of time from 1 day to 30 years, implies that rates will rise, but not very much.
There is no sense that we are returning to a period of double digit rates. Moreover, there are deflationary forces at work, notes Patricia Croft, chief economist of RBC Global Asset Management in Toronto. "The present crisis in European finance and the potential fizzling out of the present recovery in North American capital markets could presage falling inflation and even disinflation – the subsidence of rising prices and interest rates," she explains..
BMO forecasts that the rising Canadian dollar will put downward pressure on consumer prices, reflecting the fact that much of what Canadians eat and use is imported. Inflation could flare up, BMO's economists say, but there is a balanced risk of declining prices. For now, the Bank of Canada is being very cautious in its interest rate management commitments. For those who are strapped for cash, personal circumstance may dictate the choice of a fixed rate. But for everyone else, the folly of trying to make interest rate predictions over a business cycle and to predict both the short term rates and the long term rates along the yield curve should be apparent. No promises, of course, but the odds of saving money are with borrowers who choose variable rate plans or those that emulate them.
Read more: http://www.financialpost.com/personal-finance/mortgage-centre/story.html?id=2994048#ixzz0nWSeUpXO
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