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Expecting higher rates in 2019? Don’t bet on it just yet

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Ever since the Bank of Canada ratcheted its benchmark interest rate up in the summer of 2017, economists, policy-makers, central bankers (and, full disclosure, even yours truly) have been warning Canadians to expect more hikes to come as the era of virtually free money seemed to be coming to an end.

Since then, the central bank has indeed hiked its benchmark rate five times, to its current level of 1.75 per cent, and as recently as few weeks ago, economists were still forecasting as many as three more hikes by the end of 2019.

But the outlook has changed so quickly that now a move in the opposite direction is becoming a real possibility — a rate cut.

Trading in investments known as overnight index swaps suggests investors are no longer confident of even one more rate hike this year — never mind several, says Ian Pollick, head of North American rates strategy with CIBC.

 “At present, there is not a single hike priced for 2019.”

By Pollick’s math, there’s only about a 40 per cent chance of any sort of rate hike this year, and some in the market think a cut is on the table. 

It’s not difficult to see why. While the job market is chugging along, and inflation is holding steady around the two per cent level the bank likes to see, some dark clouds have started to form on the horizon.

The price of Canadian oil known as Western Canada Select briefly dipped below $15 a barrel this fall, a level that by some estimates costs Canada’s economy as much as $100 million a day. While emergency moves to cap production by the Alberta government seem to have helped, there’s no question crude’s sudden swoon is hurting the oilpatch, and by extension the whole country.

Stephen Brown at Capital Economics predicts the slump in the world price of oil could be enough to take the wind out of Canada’s economic sails, slowing GDP growth to just 1.5 per cent this year — well below the two per cent growth the Bank of Canada was forecasting as recently as October, when it nudged its rate up to where it is now.

In explaining its decision at the time, the central bank made it clear that, rather than following a predetermined path, its decision-making would be governed by hard data on how the economy was doing — things like, are consumers spending money on cars and houses? Are businesses investing? And how is the global picture for free trade looking?

On all fronts since then, the data since then has been “unambiguously negative,” as Brown puts it.

December numbers showed that consumer spending rose by just 1.2 per cent in the third quarter, the worst pace in more than four years. Canadian car sales fell last year for the first time since the financial crisis, and the Canadian Real Estate Association says it expects home sales to fall to their lowest level in almost a decade this year.

Not to mention escalating global trade tensions that seem to be getting worse by the day.

Add it all up, and the path to a rate cut has begun to emerge, Brown says.

“We would not be surprised if the Bank of Canada continues to argue that it needs to raise interest rates,” he said. “But as it becomes clear that the economy is performing worse than the bank anticipated, we expect the bank to drop this line and ultimately cut interest rates at the tail end of this year.”

Investors weren’t surprised when the Federal Reserve hiked its interest rate last month, but there’s growing speculation that the U.S. central bank could soon move in the opposite direction. (Brendan McDermid/Reuters)

To be fair, that’s far from a universal view. Arlene Kish, an economist with IHS Markit, agrees that the Bank of Canada won’t feel any obligation to hike further if the data doesn’t warrant it. But she notes that the dark clouds over parts of Canada’s economy obscure blue skies elsewhere.

While Alberta and Saskatchewan are definitely hurting, “outside of the energy patch, business investment is robust, particularly in the tech sector,” she notes. And the jobless rate plunged to a 40-year low in November, and stayed there in December even as more people joined the workforce.

While the data probably isn’t enough to warrant a hike when the bank meets next week, Kish is of the view that higher rates are still on the horizon. “We are expecting fewer rate hikes this year than previously expected [but] two 25 basis-point hikes will be the most likely scenario this year,” she said in an email this week.

U.S. even more likely to cut

That’s not what the prognosticators are predicting south of the border.

CIBC’s Pollick notes that investors are pricing a chance of a cut into every single Fed meeting this year. “It’s classic end-of-cycle behaviour,” he said in an interview.

The collapse in oil prices downgraded everyone’s expectations for inflation, including bond traders who only want rate hikes if they work to prevent inflation from eating away at their returns over time.  

Central banks don’t worry much about investor returns, and tend to set their rates to either cool down or heat up the economy as they see fit. But investors try to make money by predicting what they think the central bank is going to do, and right now they are betting that the U.S. Federal Reserve rate will be lower in May 2020 than it is today.

If inflation is headed lower, investors think interest rates have to follow suit, which is why trading in U.S. overnight index swaps has the market betting that the U.S. Federal Reserve rate will be lower in May 2020 than it is today.

The yield on a two-year government bond dipped to 2.38 per cent this week, less than the current Fed rate. That means investors think the central bank has to cut rates at some point, Historically, any time the two-year government bond rate slips below the Fed benchmark, a rate cut tends to quickly follow, as the chart below shows.

Add it all up, and the market is making clear that what was not long ago unthinkable is slowly becoming plausible.

“We’ve moved from two hikes in Canada to not even one,” Pollick said, “and from two hikes in the U.S. to cuts.”

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Real Estate

5 ways to reduce your mortgage amortization

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Since the pandemic hit, a lot of Canadians have been affected financially and if you’re on a mortgage, reducing your amortization period can be of great help.

A mortgage amortization period is the amount of time it would take a homeowner to completely pay off their mortgage. The amortization is typically an estimate based on what the interest rate for your current term is. Calculating your amortization is done easily using a loan amortization calculator which shows you the different payment schedules within your amortization period.

 In Canada, if you made a down payment that is less than the recommended 20 per cent of the total cost of your home, then the longest amortization period you’re allowed to have is 25 years. The mortgage amortization period not only affects the length of time it would take to completely repay the loan, but also the amount of interest paid over the lifecycle of the mortgage.

Typically, longer amortization periods involve making smaller monthly payments and having a much higher total interest cost over the duration of the mortgage. While on the other hand, shorter amortization periods entails making larger monthly payments and having lower total interest costs.

It’s the dream of every homeowner to become mortgage-free. A general rule of thumb would be to try and keep your monthly mortgage costs as low as possible—preferably below 30 per cent of your monthly income. Over time, you may become more financially stable by either getting a tax return, a bonus or an additional source of income and want to channel that towards your principal.

There are several ways to keep your monthly mortgage payments low and reduce your amortization. Here are a few ways to achieve that goal:

1. Make a larger down payment

Once you’ve decided to buy a home, always consider putting asides some significant amount of money that would act as a down payment to reduce your monthly mortgage. While the recommended amount to put aside as a down payment is 20 per cent,  if you aren’t in a hurry to purchase the property or are more financial buoyant, you can even pay more.

Essentially, the larger your down payment, the lower your mortgage would be as it means you’re borrowing less money from your lender. However, if you pay at least 20 per cent upfront, there would be no need for you to cover the additional cost of private mortgage insurance which would save you some money.

2. Make bi-weekly payments

Most homeowners make monthly payments which amount to 12 payments every year. But if your bank or lender offers the option of accelerated bi-weekly payment, you will be making an equivalent of one more payment annually. Doing this will further reduce your amortization period by allowing you to pay off your mortgage much faster.

3. Have a fixed renewal payment

It is normal for lenders to offer discounts on interest rate during your amortization period. However, as you continuously renew your mortgage at a lower rate, always keep a fixed repayment sum.

Rather than just making lower payments, you can keep your payments static, since the more money applied to your principal, the faster you can clear your mortgage.

4. Increase your payment amount

Many mortgages give homeowners the option to increase their payment amount at least once a year. Now, this is very ideal for those who have the financial capacity to do so because the extra money would be added to your principal.

Irrespective of how small the increase might be, in the long run, it would make a huge difference. For example, if your monthly mortgage payment is about $2,752 per month. It would be in your best interest to round it up to $2,800 every month. That way, you are much closer to reducing your mortgage amortization period.

5. Leverage on prepayment privileges

The ability for homeowners to make any form of prepayment solely depends on what mortgage features are provided by their lender.

With an open mortgage, you can easily make additional payments at any given time. However, if you have a closed mortgage—which makes up the larger percentage of existing mortgages—you will need to check if you have the option of prepayments which would allow you to make extra lump sum payments.

Additionally, there may also be the option to make extra lump sum payments at the end of your existing mortgage term before its time for renewal.

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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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