20 Jan

Bank of Canada Does Not Cut Rates


Posted by: Val Thibault

In an evenly divided call by market analysts, the Bank of Canada maintained its target for the overnight rate at 1/2 percent. The Bank said that inflation prospects are largely as expected and that “the dynamics of the global economy are broadly as anticipated in the Bank’s October Monetary Policy Report (MPR).”

Really?  Oil prices have plummeted to unexpected lows. Stock markets are declining sharply and the Canadian dollar has fallen more than expected and certainly, the output gap will remain wider for longer than suggested in the October MPR.

The Bank called the setback for the Canadian economy from the further decline is oil prices temporary. The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016. The Bank projects Canada’s economy will grow by about 1-1/2 percent in 2016 and 2-1/2 per cent in 2017, with the output gap closing around the end of 2017. This is the Bank’s forecast without including the positive impact of fiscal measures expected in the next federal budget. 

Really? I feel like the economic forecasters at the Bank of Canada are living in an parallel universe–where things are a lot rosier than here on planet earth. 

Don’t get me wrong, there are a lot of good reasons for the Bank of Canada to have refrained from cutting rates.  The Canadian dollar has already fallen sharply and a rate cut could have imprudently triggered a currency rout. With so much concern about household debt, another rate cut would run the risk of encouraging excessive borrowing. As well, with interest rates already so low, another cut is likely to have very little macroeconomic benefit and the Bank should keep some powder dry in case things deteriorate further in coming months. Moreover, the feds are going to goose the economy with infrastructure spending, so taking a wait-and-see attitude makes sense. 

But to suggest that the current weakness is due to temporary factors and a rebound is in train without the fiscal stimulus lacks credibility and appears sanguine at best and irresponsible at worst. Oil prices are not falling due to temporary factors. The world is adjusting to an alternate reality where oil supply is well in excess of sustainable demand and more supply is coming on stream from Iran. Canadian oil is among the most expensive in the world to produce and prices received by Canadian oil producers (Western Canada Select (WCS) in the chart below) are well below prices elsewhere. This inevitably continues the painful restructuring in the oil patch. These are not temporary factors.

Norway–another oil giant with expensive production–recognizes its need to accelerate its economic transformation. In its October 2015 budget, the Norwegian government declared that “the economic outlook is different than we have been accustomed to over the past 10-15 years…Oil is no longer the growth engine of the economy.”  Faced with the need to restructure, the government is keen to shift Norway from its dependence on oil towards other industries. Norges Bank, the central bank of Norway, has given forward guidance that interest rates may be cut further in 2016 from record lows despite worries of a house price bubble in Oslo and elsewhere due to increasingly low rates. Norges Bank has warned that house price inflation was higher than expected and that household debt–already at record highs–would continue to outpace income growth.

The Bank of Canada has been behind the curve ever since the decline in oil prices began in 2014, revising down its forecast for the Canadian economy in each quarterly Monetary Policy Report. How long can unanticipated temporary factors be blamed?                                            

Article Source: Dr. Sherry Cooper Chief Economist, Dominion Lending Centres 

4 Jan

Mortgage Renewal


Posted by: Val Thibault

A lot can change in a year when it comes to mortgages. These changes can provide great opportunities for mortgagees to refinance their mortgage at the time of renewal in order to save money. Unfortunately, most people are under the impression that once they sign on the dotted line they are locked into their mortgage agreement for the specified term. One study found that a staggering 70% of people simply renew their mortgage every year without even looking into other options! Refinancing can give you the leverage to make your mortgage more affordable. Here are 5 tips to help you prepare for your first mortgage renewal and save thousands of dollars!

1. Plan in Advance

Mortgage renewals are mailed out months before the renewal date. This gives you plenty of time to shop around for the best rate. Many mortgage professionals recommend a 4-6 month window to negotiate because that’s how long a lender may guarantee a discounted rate. By planning ahead you could find yourself a rate significantly lower with another lender or have a nicely discounted rate to fall back on.

2. Do Your Research

Mortgage research isn’t a one-time process you perform when buying you first home, it’s a topic you should revisit each year. The reason for ongoing research relates to the changes that occur in the marketplace. It is important to keep up-to-date with mortgage trends so you don’t get swindled into a higher rate than you deserve. The key thing to avoid when shopping for a new rate is signing with a bank’s posted rate. These rates are usually the highest the bank charges and all that extra interest will accumulate quickly, adding thousands to your mortgage total. Take the time and know what trends are doing so you can recognize a good rate when it comes along.

3. Don’t Avoid the Switch

Some mortgagees are scared to switch lenders because of hidden fees and the paperwork that may be involved with the process. If you do your research and start early enough there is no reason to avoid switching your mortgage lender. When you make a switch at renewal time there is usually no monetary penalty. Switching allows you to take advantage of lower rates and save you money, so take the plunge if you find a better deal with a different lender!

4. Negotiate on Everything

Most people only negotiate the interest rate when they’re applying for or renewing a mortgage, but all variables are open to discussion! Make sure you know the importance of the amortization period, fixed versus variable rates, and payment schedule flexibility so your negotiation power is up to its full potential. All these variables can help reduce your payments, interest rate, and overall payment period.

5. Work with a Professional

Some mortgagees find all this information rather overwhelming and some simply don’t have the time to do the necessary research. If you find yourself fitting into one of these two categories then consider hiring a mortgage professional. These brokers work for you and will handle all the shopping and negotiations required to make your mortgage more manageable.

Whether you decide to work with a professional or not make sure to do some research for yourself. It’s always a good idea to have the basic knowledge fully understood before jumping into one of the biggest purchases of your life. If you are ever unsure of any specifics, call your mortgage broker or professional to clarify. We are always happy to help guide you through the process!