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Winter is coming for the North American economy: Don Pittis

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In the sword-and-dragon fantasy Game of Thrones that has captured a huge following of readers and television viewers, characters periodically share the ominous warning, “Winter is coming.” 

As oil plunges to new lows, as the U.S.-China trade war threatens global commerce, as interest rates rise, as Canadian house prices teeter and climate change menaces the world, the North American economy faces a similar feeling of impending doom.

Later this week Canada — with its own actual winter here or on the way — will get a reading on just how gloomy we should be when Statistics Canada releases its latest gross domestic product numbers.

Preparing for a gloomier future 

In George R.R. Martin’s books and TV series you might think that with winter so near everyone would be working together, hunkering down, storing food and fuel and getting prepared for that ominous future. But no.

Instead, the characters are just too busy honing the skills that apparently keep that pseudo-medieval society hopping, namely murdering your nearest neighbours and erstwhile allies and stealing their stuff.

Just as life only imperfectly imitates art, in North America, at least, most of us have not yet got to the murdering and stealing stage.

And while everyone from the OECD to representatives of the Alberta oil sector warn of future risks, for now the North American economy seems strong. Some are wringing their hands, but most of us are just too busy getting the job done to prepare for a gloomier future.

Winter drilling in Alberta. With world fossil fuel prices falling and the made-in-Canada oil price even lower, there are growing fears for the future of the Canadian industry. (Todd Korol/Reuters)

“I think there is a fair bit of hand-wringing out there,” says Mike Moffatt, an economist at Western University’s Ivey School of Business. “I think we are in a time of heightened political risk, between Trump tariffs, Brexit, Trump’s kind of going-to-war with China.”

In Canada just now, the oil price risk is perhaps the biggest threat. It seems such a short time ago that the U.S. was hungry for our oilsands crude and willing to pay dearly for it. But not any more.

While everyone tries to imagine solutions and looks for someone to blame, market signals, including a made-in-Canada price that some say is heading for $10 US a barrel, tell a story of an enormous Canadian industry that a pipeline may not save and that output controls will do nothing to correct.

Global oil demand continues to grow but at any moment the frightening impact of climate change could well alter that.

OPEC’s nightmare 

But quite apart from environmental worries, for Canadian crude, expensive to produce and transport, there is a much greater medium-term threat expected to strike well before a pipeline could possibly arrive. That threat is outlined in a report by Bloomberg’s chief energy correspondent Javier Blas with the headline Texas Is About to Create OPEC’s Worst Nightmare.

If as the story suggests, the Permian Basin is about to challenge the Saudis with vast new output of light sweet crude that can be pumped and sent to the Gulf Coast at a world price of $30 US a barrel, then no wonder investors are wary of Alberta bitumen mined 4,000 kilometres from Gulf refineries.

As Globe and Mail columnist Gary Mason wrote last Friday, Alberta needs a Plan B and it doesn’t have one.

When OECD chief economist Laurence Boone gave her list of risks for the global economy last week, oil prices were just one of many.

“There’s not one risk that worries us, it’s the accumulation of risk,” said Boone in her presentation with the rich-world think-tank’s secretary general, Angel Gurria. “Trade, the impact of higher U.S. interest rates on emerging market economies, China’s imbalances, oil prices, inflated asset prices, politics.”

And risks come in groups, she says.

But with that list of apprehensions, neither Boone, nor Canada’s Finance Minister Bill Morneau, nor Bank of Canada governor Stephen Poloz seems worried about an economic collapse in the new year. 

Bucking the trend

In fact, according to the OECD outlook, while economic growth has peaked in the world as a whole, Canada’s economy is bucking the trend and will see faster growth next year, with GDP in 2019 rising 2.2 per cent following an expected 2.1 per cent growth rate in 2018.

One of the contributors? Legal cannabis, which on its own will boost the economy by two-tenths of one per cent.

As Moffatt reminded me, Canada’s property market is in gentle retreat and, while the U.S. expects slightly slower growth next year as Canada’s rises, the economy should remain robust.

It is after that that the OECD says countries must be prepared to step in to sustain their economies with new fiscal spending. In other words, they should not spend now but must prepare for winter.

In some ways that’s contrary to what the finance minister did last week, letting the deficit rise to help charge up GDP by cutting taxes on corporate capital spending.

According to Sonya Scott, a professor at Toronto’s York University who writes about economic history, GDP has failed to capture the majority of what Canadians have done to make the country stronger.

“When we look at things like GDP, it does tell us a story, but it doesn’t tell us about the sum total of economic activity, it doesn’t necessarily tell us about well-being,” says Scott.

And while giving tax money to companies may be one way to help keep them investing in Canada, a more powerful way may be to spend that money creating a highly skilled workforce that will make corporations come here.

As the OECD’s Gurria said last week, skills are the currency of the 21st century.

Follow Don on Twitter @don_pittis

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Real Estate

Mortgage insurance vs. life insurance: What you need to know

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Your home is likely the biggest asset you’ll ever own. So how can you protect it in case something were to happen to you? To start, homeowners have a few options to choose from. You can either:

  • ensure you have mortgage protection with a life insurance policy from an insurance company or
  • get mortgage insurance from a bank or mortgage lender.

Mortgage insurance vs. life insurance: How do they each work?  

The first thing to know is that life insurance can be a great way to make sure you and your family have mortgage protection.

The money from a life insurance policy usually goes right into the hands of your beneficiaries – not the bank or mortgage lender. Your beneficiaries are whoever you choose to receive the benefit or money from your policy after you die.

Life insurance policies, like term life insurance, come with a death benefit. A death benefit is the amount of money given to your beneficiaries after you die. The exact amount they’ll receive depends on the policy you buy.

With term life insurance, you’re covered for a set period, such as 10, 15, 20 or 30 years. The premium – that’s the monthly or annual fee you pay for insurance – is usually low for the first term.

If you die while you’re coved by your life insurance policy, your beneficiaries will receive a tax-free death benefit. They can then use this money to help pay off the mortgage or for any other reason. So not only is your mortgage protected, but your family will also have funds to cover other expenses that they relied on you to pay.

Mortgage insurance works by paying off the outstanding principal balance of your mortgage, up to a certain amount, if you die.

With mortgage insurance, the money goes directly to the bank or lender to pay off the mortgage – and that’s it. There’s no extra money to cover other expenses, and you don’t get to leave any cash behind to your beneficiaries.

What’s the difference between mortgage insurance and life insurance?

The main difference is that mortgage insurance covers only your outstanding mortgage balance. And, that money goes directly to the bank or mortgage lender, not your beneficiary. This means that there’s no cash, payout or benefit given to your beneficiary. 

With life insurance, however, you get mortgage protection and more. Here’s how it works: every life insurance policy provides a tax-free amount of money (the death benefit) to the beneficiary. The payment can cover more than just the mortgage. The beneficiary may then use the money for any purpose. For example, apart from paying off the mortgage, they can also use the funds from the death benefit to cover:

  • any of your remaining debts,
  • the cost of child care,
  • funeral costs,
  • the cost of child care, and
  • any other living expenses. 

But before you decide between life insurance and mortgage insurance, here are some other important differences to keep in mind:

Who gets the money?

With life insurance, the money goes to whomever you name as your beneficiary.

With mortgage insurance, the money goes entirely to the bank.

Can you move your policy?

With life insurance, your policy stays with you even if you transfer your mortgage to another company. There’s no need to re-apply or prove your health is good enough to be insured.

With mortgage insurance, however, your policy doesn’t automatically move with you if you change mortgage providers. If you move your mortgage to another bank, you’ll have to prove that your health is still good.

Which offers more flexibility, life insurance or mortgage insurance?

With life insurance, your beneficiaries have the flexibility to cover the mortgage balance and more after you die. As the policy owner, you can choose how much insurance coverage you want and how long you need it. And, the coverage doesn’t decline unless you want it to.

With mortgage insurance through a bank, you don’t have the flexibility to change your coverage. In this case, you’re only protecting the outstanding balance on your mortgage.

Do you need a medical exam to qualify? 

With a term life insurance policy from Sun Life, you may have to answer some medical questions or take a medical exam before you’re approved for coverage. Once you’re approved, Sun Life won’t ask for any additional medical information later on.

With mortgage insurance, a bank or mortgage lender may ask some medical questions when you apply. However, if you make a claim after you’re approved, your bank may ask for additional medical information.* At that point, they may discover some conditions that disqualify you from receiving payment on a claim.

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Real Estate

5 common mistakes Canadians make with their mortgages

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This article was created by MoneyWise. Postmedia and MoneyWise may earn an affiliate commission through links on this page.

Since COVID-19 dragged interest rates to historic lows last year, Canadians have been diving into the real estate market with unprecedented verve.

During a time of extraordinary financial disruption, more than 551,000 properties sold last year — a new annual record, according to the Canadian Real Estate Association. Those sales provided a desperately needed dose of oxygen for the country’s gasping economy.

Given the slew of new mortgages taken out in 2020, there were bound to be slip-ups. So, MoneyWise asked four of the country’s sharpest mortgage minds to share what they feel are the mistakes Canadians most frequently make when securing a home loan.

Mistake 1: Not having your documents ready

One of your mortgage broker’s primary functions is to provide lenders with paperwork confirming your income, assets, source of down payment and overall reliability as a borrower. Without complete and accurate documentation, no reputable lender will be able to process your loan.

But “borrowers often don’t have these documents on hand,” says John Vo of Spicer Vo Mortgages in Halifax, Nova Scotia. “And even when they do provide these documents, they may not be the correct documentation required.”

Some of the most frequent mistakes Vo sees when borrowers send in their paperwork include:

  • Not including a name or other relevant details on key pieces of information.
  • Providing old bank or pay statements instead of those dated within the last 30 days.
  • Sending only a partial document package. If a lender asks for six pages to support your loan, don’t send two. If you’re asked for four months’ worth of bank statements, don’t provide only one.
  • Thinking low-quality or blurry files sent by email or text will be good enough. Lenders need to be able to read what you send them.

If you send your broker an incomplete documents package, the result is inevitable: Your mortgage application will be delayed as long as it takes for you to find the required materials, and your house shopping could be sidetracked for months.

Mistake 2: Blinded by the rate

Ask any mortgage broker and they’ll tell you that the question they’re asked most frequently is: “What’s your lowest rate?”

The interest rate you’ll pay on your mortgage is a massive consideration, so comparing the rates lenders are offering is a good habit once you’ve slipped on your house-hunter hat.

Rates have been on the rise lately given government actions to stimulate the Canadian economy. You may want to lock a low rate now, so you can hold onto it for up to 120 days.

But Chris Kolinski, broker at Saskatoon, Saskatchewan-based iSask Mortgages, says too many borrowers get obsessed with finding the lowest rate and ignore the other aspects of a mortgage that can greatly impact its overall cost.

“I always ask my clients ‘Do you want to get the best rate, or do you want to save the most money?’ because those two things are not always synonymous,” Kolinski says. “That opens a conversation about needs and wants.”

Many of the rock-bottom interest rates on offer from Canadian lenders can be hard to qualify for, come with limited features, or cost borrowers “a ton” of money if they break their terms, Kolinski points out.

Mistake 3: Not reading the fine print

Dalia Barsoum of Streetwise Mortgages in Woodbridge, Ontario, shares a universal message: “Read the fine print. Understand what you’re signing up for.”

Most borrowers don’t expect they’ll ever break their mortgages, but data collected by TD Bank shows that 7 in 10 homeowners move on from their properties earlier than they expect.

It’s critical to understand your loan’s prepayment privileges and the rules around an early departure. “If you exit the mortgage, how much are you going to pay? It’s really, really important,” Barsoum says.

She has seen too borrowers come to her hoping to refinance a mortgage they received from a private or specialty lender, only to find that what they were attempting was impossible.

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Canadian mortgage rules: What you should know

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If you’re a new homebuyer seeking a mortgage, or an existing homeowner looking to switch or refinance, it’s important that you’re up-to-date on the new mortgage rules in Canada. Here are some of the top things you should keep in mind if you’re looking for a new home. 

The Canadian Mortgage Stress test in 2021

The stress test was introduced on January 1, 2018, as a way to protect Canadian homeowners by requiring banks to check that a borrower can still make their payment at a rate that’s higher than they will actually pay.  The purpose of the stress test is to evaluate if a borrower (a.k.a. the potential homeowner) can handle a possible increase in their mortgage rate.

For Canadians to qualify for a federally regulated bank loan, they need to pass the stress test. To do this, homebuyers need to prove that they can afford a mortgage at a qualifying rate. For homebuyers who have a down payment of 20% or more, currently the qualifying rate is determined using the Bank of Canada’s five-year benchmark or the interest rate offered by the lender plus 2%, whichever is higher. For homebuyers who have a down payment of less than 20%, the qualifying rate is the higher of the Bank of Canada five-year benchmark rate and the interest rate offered by the lender.

This stress test is also performed with homeowners looking to refinance, take out a secured line of credit, or change mortgage lenders. Those who renew with the same lender will not have to undergo the stress test.

Other new mortgage rules in Canada

As of July 2020, a number of changes were implemented for all high-ratio mortgages to be insured by the Canada Mortgage and Housing Corporation (CMHC).

A high-ratio mortgage is one where the borrower has a minimum down payment of less than 20% of the purchase price of the home. A high-ratio mortgage is also referred to as a default insured mortgage. Let’s break down what recent changes have been made.

Qualification rate

The new CMHC rules will lower the amount of debt that borrowers with a default insured mortgage can carry. Mortgage applicants will be limited to spending a maximum of 35% of their gross income on housing and can only borrow up to 42% of their gross income once other loans are included. This is down from the previous 39% and 44%.

Credit score

The new rules also require the borrower to have a minimum credit score of 680 (good score). If you are purchasing a home with your partner, one of you must have a score of 680. This is up from the previous minimum score of 600 (fair score).

Down payment

Homebuyers are now required to use their own money for a down payment instead of borrowed funds. This means homebuyers are no longer able to use unsecured personal loans, unsecured lines of credit or credit cards to fund their down payment.

Homebuyers with a down payment of less than 20% of the purchase price are required to purchase mortgage default insurance. Properties costing $1 million or more are not eligible for mortgage default insurance.

CMHC and CREA projections

Due to the pandemic, job loss, business closures, and a drop in immigration, CMHC predicted a 9% to 18% decrease in housing prices from June 2020 to June 2021.* However, this prediction hasn’t come to fruition.

Instead, 2020 ended up being a record year for Canadian resale housing activity, according to Costa Poulopoulos, the Chair of the Canadian Real Estate Association (CREA).**

The CREA predicts that all provinces except Ontario will see an increase in sales activity into 2021 as a result of low-interest rates and an improving economy. As for the CMHC, they stand by their original prediction.

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