Looking at the asset mix of a portfolio is the easy part. Deciding how to break out where investments should be held is not so easy. Decisions about where to hold investments can have a significant long-term effect on your wealth. I believe that for wealthy Canadians, this is where some of the biggest investment mistakes occur.
Here are some key rules to follow to squeeze the most out of your investments.
Consider a basic scenario that we might use with a client:
Taxable accounts
Cash and equivalents 8 per cent
Preferred shares 27 per cent
Bonds/Convertible Debentures 5 per cent
Stocks (Growth) 60 per cent
RRSP/RRIF/TFSA accounts
Cash and equivalents: 2 per cent
Preferred shares: 0 per cent
Bonds/Convertible Debentures: 68 per cent
Stocks (Dividend): 30 per cent
Total accounts
Cash and equivalents: 5 per cent
Preferred shares: 13 per cent
Bonds/Convertible Debentures: 37 per cent
Stocks: 45 per cent
Conventional wisdom suggests that it is important to start out with a well thought out review of your overall asset mix. The next step is to maximize it for tax purposes.
If an Ontario resident has $60,000 of income, the tax rate on interest is 31 per cent, on capital gains it is 16 per cent, and on dividends from eligible corporations (most publicly traded Canadian companies), the tax rate is 10 per cent.
The above illustration outlines how to take advantage of these differences.
In the cash or taxable accounts, there is 13 per cent that would have interest income (8 per cent cash plus 5 per cent bonds). This faces the highest tax rate, and is generally to be kept to a minimum in a taxable account.
The preferred shares are in the cash account for safety, but also because they produce dividend income, which is taxed at a much lower rate than interest.
The stocks are geared more toward growth companies that may not generate any taxable income. The only tax consequence is from the gains or losses resulting when the stock is sold. For gains, this can be deferred for many years without paying tax. In addition, if someone is affected by clawbacks to Old Age Security because of their income, the growth stocks can significantly help as they would produce very little income, as opposed to other investments.
On the tax-sheltered side, we want to look at the overall asset target, and make sure that the highest-tax investments are held in a place where the tax is sheltered. As a result, almost all of the bonds are held in the tax-sheltered accounts. For the equities, we put the income-producing stocks in here rather than in the cash or taxable account. Another reason for this stock separation is that growth stocks tend to be more volatile and, in general, are more likely to see a capital loss (as well as a higher capital gain). If they are held in an RRSP, then the tax benefits of a capital loss will disappear. To be more clear, if you buy a stock for $10 and sell it for $0 in an RSP, you have lost 100 per cent of your investment. If it is held in a taxable account, at least you can use that $10 loss against a $10 capital gain. For someone in the top tax bracket, that $10 loss can be worth $2.30.
You can make an argument that high-growth companies should be held in an RSP because if there are large gains, you don’t have to pay capital gains taxes. This can make sense in some cases, but makes more sense for someone younger. For someone older, this gain will ultimately turn into taxable income when withdrawn from an RSP or RIF – possibly within 10 or 20 years. If someone is younger, this capital gain can grow tax-free for a much longer period of time and provide much greater benefit before it is withdrawn and taxed at the highest rate.
Now comes the issue of Tax-Free Savings Accounts: Should they be managed the same way as an RSP in terms of sheltering taxable income?
There are two schools of thought. One is to simply shelter income in the TFSA, so you would hold bonds and cash and interest income-generating investments in the TFSA.
The other school of thought is to invest in small-cap growth stocks, the benefit being that if the stocks grow significantly, it actually boosts the total amount of TFSA sheltering room you can use in the future.
I think both make sense as long as you maintain the overall discipline around your portfolio asset mix.
The key point is that investing is all about what you keep after all fees and taxes. The hard money is made by strong investment management. The easy money is made by being tax smart. Unfortunately, too many people are leaving the easy money on the table.
Friday, January 28, 2011
Tuesday, January 25, 2011
What you should know about Mortgages
So you are thinking about buying a new home? You may be wondering how mortgages work, if you would qualify for a mortgage loan, and if there are any special issues you should be aware of.
Here is a look at some facts and information about mortgages.
Canada has one of the most solid mortgage systems in the world, which has evolved over many decades. It’s a balanced system that helps people become homeowners, while not encouraging excessive risks-that is, it demands responsible behaviour from both lenders and borrowers. Read more.
Here is a look at some facts and information about mortgages.
Canada has one of the most solid mortgage systems in the world, which has evolved over many decades. It’s a balanced system that helps people become homeowners, while not encouraging excessive risks-that is, it demands responsible behaviour from both lenders and borrowers. Read more.
Canadian growth less than expected: IMF
The global economy is set to improve faster than expected this year, but while developing economies will exceed expectations, advanced economies such as Canada will see slower growth in 2011, according to a new report from the International Monetary Fund.
The World Economic Outlook issued Tuesday by the IMF predicts the global economy will expand by about 4.5 per cent this year, up from an earlier prediction of 4.2 per cent.
Canada's 2011 growth estimate is revised downward in the report, from 2.7 per cent predicted a few months ago down to 2.3 per cent.
Overall, advanced economies will slow from the 3 per cent growth recorded last year, to about 2.5 per cent this year.
However emerging economies will see a much faster rate of improvement, with predicted growth of 6.6 per cent this year and similar advances in 2012. That's down slightly from 7.1 per cent last year, but still a strong rate of advance.
In its Global Financial Stability Report, issued alongside the World Economic Outlook report, the IMF said there are still major problems within the global economy.
"Nearly four years after the onset of the largest financial crisis since the Great Depression, global financial stability is still not assured and there remain significant policy challenges to be addressed," said the report.
The report focused particular concern on Europe's weak economic health and said more money should be put into bank rescue funds.
"The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally," the WEO Update said.
Among advanced economies, the reports predicted the following:
Canada
2010: 2.9
2011: 2.3
U.S.
2010 -- 2.8
2011 -- 3.0
Euro Area
2010 -- 1.8
2011 -- 1.5
Japan
2010 -- 4.3
2011 -- 1.6
U.K.
2010: 1.7
2011: 2.0
But the numbers are more robust among "emerging and developing" economies. Russia is predicted to improve from 3.7 per cent growth to 4.5 per cent. China will see a dip from 10.3 per cent growth to a still-impressive 9.6 per cent. Sub-Saharan Africa is predicted to go from 5 per cent growth in 2010 to 5.5 per cent in 2011.
In the Global Economic Stability report the Washington-based IMF said financial problems in Ireland and Greece have raised fears among other countries about the manageability of their sovereign debt.
Jose Vinals, the IMF's director of monetary and capital markets, told reporters that even more than two years after the global financial crisis, global financial stability is still at risk.
"Banks face significant funding needs now and over the next two years. In many advanced economies, we need to deal with the legacy of the crisis by resolving financial fragilities once and for all," Vinals said.
The World Economic Outlook issued Tuesday by the IMF predicts the global economy will expand by about 4.5 per cent this year, up from an earlier prediction of 4.2 per cent.
Canada's 2011 growth estimate is revised downward in the report, from 2.7 per cent predicted a few months ago down to 2.3 per cent.
Overall, advanced economies will slow from the 3 per cent growth recorded last year, to about 2.5 per cent this year.
However emerging economies will see a much faster rate of improvement, with predicted growth of 6.6 per cent this year and similar advances in 2012. That's down slightly from 7.1 per cent last year, but still a strong rate of advance.
In its Global Financial Stability Report, issued alongside the World Economic Outlook report, the IMF said there are still major problems within the global economy.
"Nearly four years after the onset of the largest financial crisis since the Great Depression, global financial stability is still not assured and there remain significant policy challenges to be addressed," said the report.
The report focused particular concern on Europe's weak economic health and said more money should be put into bank rescue funds.
"The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally," the WEO Update said.
Among advanced economies, the reports predicted the following:
Canada
2010: 2.9
2011: 2.3
U.S.
2010 -- 2.8
2011 -- 3.0
Euro Area
2010 -- 1.8
2011 -- 1.5
Japan
2010 -- 4.3
2011 -- 1.6
U.K.
2010: 1.7
2011: 2.0
But the numbers are more robust among "emerging and developing" economies. Russia is predicted to improve from 3.7 per cent growth to 4.5 per cent. China will see a dip from 10.3 per cent growth to a still-impressive 9.6 per cent. Sub-Saharan Africa is predicted to go from 5 per cent growth in 2010 to 5.5 per cent in 2011.
In the Global Economic Stability report the Washington-based IMF said financial problems in Ireland and Greece have raised fears among other countries about the manageability of their sovereign debt.
Jose Vinals, the IMF's director of monetary and capital markets, told reporters that even more than two years after the global financial crisis, global financial stability is still at risk.
"Banks face significant funding needs now and over the next two years. In many advanced economies, we need to deal with the legacy of the crisis by resolving financial fragilities once and for all," Vinals said.
Monday, January 24, 2011
Tighter mortgage rules may yet save us from ourselves
By Ray Turchansky, Freelance Edmonton Journal
People who remember the days when there was only one type of mortgage -- with interest fixed at five per cent annually for the entire 25 years -- will also remember the cartoon character Pogo saying: "I have met the enemy, and he is us."
Indeed, there are times when we need to be saved from ourselves.
Two years ago, when Trevor Hamon was branch manager with Dundee Private Investors, he warned of serious peril by banks offering home-equity lines of credit and by people taking debt into retirement. I've since seen people go $100,000 into their HELOC, lose it investing on penny stocks and essentially wind up paying for their home twice.
In fact, Canadians currently owe $1.48 for every dollar of their disposable income, which is more household debt per capita than in the United States. And the argument that household debt is immaterial as long as the value of the house increases is no longer comforting. TD Economics expects existing home sales in Canada to drop about eight per cent in 2011 and prices to slip one per cent.
So the government faced two options -- raise Bank of Canada interest rates, which would soon increase mortgage rates, or tighten mortgage lending rules, which was wisely done for the third time since 2008.
Effective March 18, the maximum amortization period is reduced from 35 to 30 years for government-backed mortgages with loan-to-value ratios greater than 80 per cent; and the maximum Canadians can borrow to refinance their mortgage falls from 90 to 85 per cent of the value of their homes.
In addition, effective April 18, the government will no longer insure lines of credit with homes as collateral, such as home-equity lines of credit.
The Canadian Association of Accredited Mortgage Professionals said in a news release that it "supports measures that strengthen owners' equity in their homes and encourages the reduction of their mortgages. CAAMP is also pleased that there was no change made to the down-payment requirement as it recommended."
Less enthusiastic was Randall McCauley, vice-president of government relations at the Canadian Real Estate Association, who said in a release: "We're not sure the government needed to take this step now."
Much has been made about how reducing amortization periods from 35 to 30 years on a $300,000 mortgage at four-per-cent interest will cause monthly payments to go up $105. Instead, people should be thankful that the change will save them $42,288 in interest.
Adrian Mastracci, portfolio manager with KCM Wealth Management in Vancouver, has shown that paying off a $240,000 mortgage at 5.75 per cent costs you $65,165 in interest if paid off in 10 years, but $313,410 in interest if paid off over 35 years.
Said Mastracci after the latest mortgage changes were announced: "The repayment of debt is a best investment for many, particularly in jittery times, and it's risk free."
Two rules of thumb are not to go into debt for consumer purchases using either home equity because the value of the home could drop, or retirement savings because you might not be able to fund living expenses once employment income ends. The exception is when you combine the two by taking out the $25,000 allowed from your registered retirement savings account under the Home Buyers Plan, which makes sense because you have to pay it back or be taxed on the withdrawal, and because you're not paying interest on the loan.
The concept of home ownership is often founded on three beliefs: that interest rates won't spike, making payments unbearable to maintain; that the homebuyer will remain employed; and that property value will continue to rise and build up equity.
But in the U.S., after prolonged near-zero interest rates lured people to buy houses, interest rates rose, the financial crisis boosted unemployment and people used their homes as automatic-teller machines, refinancing them to buy depreciating assets like gas-guzzling cars and flat-screen TVs. The result was a deluge of houses for sale, which lowered prices and in many cases wiped out home equity completely.
The Canadian government saw housing become a sinkhole in the U.S. and has decided to Sherpa us around that crevasse.
In 2006, mortgage insurers, including Canada Mortgage and Housing Corp., began extending amortization periods from 25 to 30 years, then 35 and even 40. There was even talk of 50-year mortgages. At the same time they began insuring interest-only loans that essentially required no down payment.
When more than half the mortgages taken out during the first six months of 2008 had 40-year amortization periods, the federal government started putting speed bumps on the road to ruin. It reduced mortgage maximums to 35 years and eliminated interest-only loans by requiring a minimum five-per-cent down payment.
Last year came a second round of changes, making borrowers meet the standards for five-year interest rates, lowering maximum mortgage refinancing from 95 to 90 per cent of home value and requiring a 20-percent down payment for government-backed mortgage insurance on rental or investment properties not lived in by the owner.
And now, a third wave of changes, to save us from ourselves.
People who remember the days when there was only one type of mortgage -- with interest fixed at five per cent annually for the entire 25 years -- will also remember the cartoon character Pogo saying: "I have met the enemy, and he is us."
Indeed, there are times when we need to be saved from ourselves.
Two years ago, when Trevor Hamon was branch manager with Dundee Private Investors, he warned of serious peril by banks offering home-equity lines of credit and by people taking debt into retirement. I've since seen people go $100,000 into their HELOC, lose it investing on penny stocks and essentially wind up paying for their home twice.
In fact, Canadians currently owe $1.48 for every dollar of their disposable income, which is more household debt per capita than in the United States. And the argument that household debt is immaterial as long as the value of the house increases is no longer comforting. TD Economics expects existing home sales in Canada to drop about eight per cent in 2011 and prices to slip one per cent.
So the government faced two options -- raise Bank of Canada interest rates, which would soon increase mortgage rates, or tighten mortgage lending rules, which was wisely done for the third time since 2008.
Effective March 18, the maximum amortization period is reduced from 35 to 30 years for government-backed mortgages with loan-to-value ratios greater than 80 per cent; and the maximum Canadians can borrow to refinance their mortgage falls from 90 to 85 per cent of the value of their homes.
In addition, effective April 18, the government will no longer insure lines of credit with homes as collateral, such as home-equity lines of credit.
The Canadian Association of Accredited Mortgage Professionals said in a news release that it "supports measures that strengthen owners' equity in their homes and encourages the reduction of their mortgages. CAAMP is also pleased that there was no change made to the down-payment requirement as it recommended."
Less enthusiastic was Randall McCauley, vice-president of government relations at the Canadian Real Estate Association, who said in a release: "We're not sure the government needed to take this step now."
Much has been made about how reducing amortization periods from 35 to 30 years on a $300,000 mortgage at four-per-cent interest will cause monthly payments to go up $105. Instead, people should be thankful that the change will save them $42,288 in interest.
Adrian Mastracci, portfolio manager with KCM Wealth Management in Vancouver, has shown that paying off a $240,000 mortgage at 5.75 per cent costs you $65,165 in interest if paid off in 10 years, but $313,410 in interest if paid off over 35 years.
Said Mastracci after the latest mortgage changes were announced: "The repayment of debt is a best investment for many, particularly in jittery times, and it's risk free."
Two rules of thumb are not to go into debt for consumer purchases using either home equity because the value of the home could drop, or retirement savings because you might not be able to fund living expenses once employment income ends. The exception is when you combine the two by taking out the $25,000 allowed from your registered retirement savings account under the Home Buyers Plan, which makes sense because you have to pay it back or be taxed on the withdrawal, and because you're not paying interest on the loan.
The concept of home ownership is often founded on three beliefs: that interest rates won't spike, making payments unbearable to maintain; that the homebuyer will remain employed; and that property value will continue to rise and build up equity.
But in the U.S., after prolonged near-zero interest rates lured people to buy houses, interest rates rose, the financial crisis boosted unemployment and people used their homes as automatic-teller machines, refinancing them to buy depreciating assets like gas-guzzling cars and flat-screen TVs. The result was a deluge of houses for sale, which lowered prices and in many cases wiped out home equity completely.
The Canadian government saw housing become a sinkhole in the U.S. and has decided to Sherpa us around that crevasse.
In 2006, mortgage insurers, including Canada Mortgage and Housing Corp., began extending amortization periods from 25 to 30 years, then 35 and even 40. There was even talk of 50-year mortgages. At the same time they began insuring interest-only loans that essentially required no down payment.
When more than half the mortgages taken out during the first six months of 2008 had 40-year amortization periods, the federal government started putting speed bumps on the road to ruin. It reduced mortgage maximums to 35 years and eliminated interest-only loans by requiring a minimum five-per-cent down payment.
Last year came a second round of changes, making borrowers meet the standards for five-year interest rates, lowering maximum mortgage refinancing from 95 to 90 per cent of home value and requiring a 20-percent down payment for government-backed mortgage insurance on rental or investment properties not lived in by the owner.
And now, a third wave of changes, to save us from ourselves.
Friday, January 21, 2011
Lending standards may already be too tight: mortgage professionals
By Sunny Freeman, The Canadian Press
TORONTO - The risk of mortgage rates rising to unaffordable levels in the near future is "negligible" and recent measures taken by Ottawa to clamp down on housing loans may be too harsh, says Canada's mortgage industry association.
Due to the effect of tightened lending rules "housing demand at present and for the near future is probably lower than it needs to be," according to the Canadian Association of Accredited Mortgage Professionals, which represents brokers and others in the industry.
In fact, the group suggested in a report Wednesday that the rules may need to be relaxed.
CAAMP said that a vast majority of borrowers studied had left themselves room to absorb a hike of as much as one percentage point on fixed-rate mortgages and even more on variable-rate mortgages.
"Canadians — lenders and borrowers — have been highly prudent in the mortgage market," Will Dunning, the association's chief economist, wrote in the report.
"There have been some calls for mortgage lending criteria to be tightened further. This analysis concludes that Canadian lending criteria are already tight enough. In fact, some might argue that with the changes implemented in April 2010, Canadian criteria are currently too tight."
The report came two days after federal Finance Minister Jim Flaherty further altered lending rules to curb higher-risk borrowing in the housing sector. Changes coming into effect in March include reducing the maximum amortization period to 30 years from 35 for insured mortgages and limiting how much money Canadians can borrow using their homes.
It was the third time mortgage rules have been tightened in the past three years, a period in which historically low interest rates have been fuel for rampant borrowing.
On Tuesday, Bank of Canada governor Mark Carney left the key overnight lending rate untouched at one per cent, but with a renewed warning that household debt is mounting.
Both Carney and Flaherty have warned repeatedly over the past several months that Canadian consumer debt is rising too rapidly and threatens the future health of the economy.
Flaherty dismissed the CAAMP report Wednesday, noting that the group has a vested interest in seeing the housing and mortgage markets remain robust.
"My concern has been to strike the right balance between the availability of credit in the residential housing sector and the danger of developing any sort of bubble in the housing sector," he told reporters, adding that he doesn't believe further tightening will be necessary at this time.
John Andrew, a professor at Queen's University School of Urban and Regional Planning, said it's unlikely mortgage reforms would put a significant chill on the housing market because the changes are aimed at the highest-risk borrowers, who are already unlikely to qualify for insured borrowing from most lenders.
"I dispute their claim that the housing market is slowing down," he said.
"I don't see (mortgage changes) really affecting the market that much because there really aren't that many lenders that are going to be lending ... to that type of a borrower anyway."
But CAAMP said changes made by Flaherty last April had already disqualified a significant number of potential borrowers, thereby curbing debt growth.
Last April, the government introduced changes that forced borrowers to meet the standards for a five-year fixed-rate mortgage even when applying for a lower interest, shorter-term loan.
That slimmed average gross debt service ratios, a measure used by banks to test how much housing debt will eat into income, by about one per cent to 19.3 per cent in the second half of the year, the CAAMP report said.
The study also tested the impact of higher mortgage interest rates, assuming a rate of five per cent by the end of 2012. That would raise the cost of a fixed-rate mortgage by about one percentage point but would have a bigger impact for those with variable rates, about 2.5 per cent.
It found that expected increases in income levels should more than offset increases in interest rate payments and most borrowers would be able to absorb the shock.
"Recent mortgage lending, in an environment of very low interest rates, results in some risk of financial difficulties if and when interest rates increase in future," Dunning wrote in the report.
"However, the degree of risk does appear to be extremely small."
Still, the CAAMP report found the amount of outstanding mortgage debt in Canada surpassed $1 trillion in August and stood at $1.08 trillion in October — about 57 per cent higher than five years earlier.
That represented a debt growth rate of 9.4 per cent per year. The figure is slightly lower than the average over the past decade, but troubling because it far surpassed income growth.
Mortgage defaults also remain higher — at about 0.43 per cent — than they were before the recession, when the rate stood at less than 0.30 per cent, the report found.
However, CAAMP said that as the housing market slows, debt growth is already decelerating and as of October stood closer to seven per cent, below the 10 per cent average for the decade.
The report was based on 59,000 insured mortgages for home purchases and 26,500 for refinancing that were funded in 2010. The vast majority of those included in the data — 97 per cent —were considered high risk, meaning the loan-to-value ratio exceeded 80 per cent.
TORONTO - The risk of mortgage rates rising to unaffordable levels in the near future is "negligible" and recent measures taken by Ottawa to clamp down on housing loans may be too harsh, says Canada's mortgage industry association.
Due to the effect of tightened lending rules "housing demand at present and for the near future is probably lower than it needs to be," according to the Canadian Association of Accredited Mortgage Professionals, which represents brokers and others in the industry.
In fact, the group suggested in a report Wednesday that the rules may need to be relaxed.
CAAMP said that a vast majority of borrowers studied had left themselves room to absorb a hike of as much as one percentage point on fixed-rate mortgages and even more on variable-rate mortgages.
"Canadians — lenders and borrowers — have been highly prudent in the mortgage market," Will Dunning, the association's chief economist, wrote in the report.
"There have been some calls for mortgage lending criteria to be tightened further. This analysis concludes that Canadian lending criteria are already tight enough. In fact, some might argue that with the changes implemented in April 2010, Canadian criteria are currently too tight."
The report came two days after federal Finance Minister Jim Flaherty further altered lending rules to curb higher-risk borrowing in the housing sector. Changes coming into effect in March include reducing the maximum amortization period to 30 years from 35 for insured mortgages and limiting how much money Canadians can borrow using their homes.
It was the third time mortgage rules have been tightened in the past three years, a period in which historically low interest rates have been fuel for rampant borrowing.
On Tuesday, Bank of Canada governor Mark Carney left the key overnight lending rate untouched at one per cent, but with a renewed warning that household debt is mounting.
Both Carney and Flaherty have warned repeatedly over the past several months that Canadian consumer debt is rising too rapidly and threatens the future health of the economy.
Flaherty dismissed the CAAMP report Wednesday, noting that the group has a vested interest in seeing the housing and mortgage markets remain robust.
"My concern has been to strike the right balance between the availability of credit in the residential housing sector and the danger of developing any sort of bubble in the housing sector," he told reporters, adding that he doesn't believe further tightening will be necessary at this time.
John Andrew, a professor at Queen's University School of Urban and Regional Planning, said it's unlikely mortgage reforms would put a significant chill on the housing market because the changes are aimed at the highest-risk borrowers, who are already unlikely to qualify for insured borrowing from most lenders.
"I dispute their claim that the housing market is slowing down," he said.
"I don't see (mortgage changes) really affecting the market that much because there really aren't that many lenders that are going to be lending ... to that type of a borrower anyway."
But CAAMP said changes made by Flaherty last April had already disqualified a significant number of potential borrowers, thereby curbing debt growth.
Last April, the government introduced changes that forced borrowers to meet the standards for a five-year fixed-rate mortgage even when applying for a lower interest, shorter-term loan.
That slimmed average gross debt service ratios, a measure used by banks to test how much housing debt will eat into income, by about one per cent to 19.3 per cent in the second half of the year, the CAAMP report said.
The study also tested the impact of higher mortgage interest rates, assuming a rate of five per cent by the end of 2012. That would raise the cost of a fixed-rate mortgage by about one percentage point but would have a bigger impact for those with variable rates, about 2.5 per cent.
It found that expected increases in income levels should more than offset increases in interest rate payments and most borrowers would be able to absorb the shock.
"Recent mortgage lending, in an environment of very low interest rates, results in some risk of financial difficulties if and when interest rates increase in future," Dunning wrote in the report.
"However, the degree of risk does appear to be extremely small."
Still, the CAAMP report found the amount of outstanding mortgage debt in Canada surpassed $1 trillion in August and stood at $1.08 trillion in October — about 57 per cent higher than five years earlier.
That represented a debt growth rate of 9.4 per cent per year. The figure is slightly lower than the average over the past decade, but troubling because it far surpassed income growth.
Mortgage defaults also remain higher — at about 0.43 per cent — than they were before the recession, when the rate stood at less than 0.30 per cent, the report found.
However, CAAMP said that as the housing market slows, debt growth is already decelerating and as of October stood closer to seven per cent, below the 10 per cent average for the decade.
The report was based on 59,000 insured mortgages for home purchases and 26,500 for refinancing that were funded in 2010. The vast majority of those included in the data — 97 per cent —were considered high risk, meaning the loan-to-value ratio exceeded 80 per cent.
Thursday, January 20, 2011
Further rise in Canadian dollar could delay rate hike
MICHAEL BABAD
Among the many things complicating Mark Carney's life are a fat current account deficit and a strong dollar that could stay his hand on interest rates.
Mr. Carney and his rate-setting panel at the Bank of Canada flagged both those issues yesterday when they held their benchmark rate at 1 per cent. They also cited poor productivity gains among Canadian businesses, Europe's debt troubles, and the tentative nature of the global recovery.
They did upgrade their outlook for Canadian growth, and said the global rebound was picking up speed. But one of the things that caught the eye of economists was the fact that the central bank mentioned, for the first time in recent memory, the current account deficit, which swelled in the third quarter of last year to $17.5-billion.
That was the eighth quarterly deficit since late 2008.
"Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities," the Bank of Canada said as it announced no change in the overnight rate.
"However, the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high."
The current account is the broadest measure of trade. As Globe and Mail economics reporter Jeremy Torobin wrote Wednesday, a deficit in the flow of trade and foreign investment can provide an early warning of a country taking on too much debt, while a surplus can show it doing little to stimulate domestic demand.
The Canadian dollar , while slipping yesterday on the Bank of Canada's comments, has been hovering over parity with its U.S. counterpart, and economists suggest further gains in the currency could prompt the central bank to hold off on raising interest rates. While rates are expected to remain unchanged for some time yet, the timing of the next rate hike has been a source of speculation.
"If you were looking for a sign from the Bank of Canada that it was uncomfortable with the Canadian dollar's recent trip through parity, look no further than Tuesday's policy statement," said BMO Nesbitt Burns economist Benjamin Reitzes.
"The bank specifically mentioned the current account deficit for the first time in recent memory, highlighting its 20-year extreme. The 'persistent strength in the Canadian dollar' and poor productivity performance ... were stated as the key reasons for the deterioration. The bank's apparent unease with the continued C$ strength suggest that a further appreciation could delay the next round of rate hikes beyond current expectations."
As for productivity, the Bank of Canada has "put it on its list" of threats to the economy, added Sal Guatieri, Mr. Reitzes' colleague at BMO.
Lagging productivity has been an issue that has dogged Canada for some time.
Over the past year, Canadian factories have actually outperformed those in the United States by driving labour costs down at a faster pace, Mr. Guatieri said, but he compared that to "the woeful underperformance" of the previous nine years.
"Any backsliding in productivity could worsen Canada's competitiveness, widen its current account deficit, detract from growth - and temper the monetary tightening cycle," he said.
Senior economist Pascal Gauthier of Toronto-Dominion Bank added that Mr. Carney and his colleagues appear "to have gone to lengths not to sound hawkish" in an attempt to spark another surge in the dollar.
Among the many things complicating Mark Carney's life are a fat current account deficit and a strong dollar that could stay his hand on interest rates.
Mr. Carney and his rate-setting panel at the Bank of Canada flagged both those issues yesterday when they held their benchmark rate at 1 per cent. They also cited poor productivity gains among Canadian businesses, Europe's debt troubles, and the tentative nature of the global recovery.
They did upgrade their outlook for Canadian growth, and said the global rebound was picking up speed. But one of the things that caught the eye of economists was the fact that the central bank mentioned, for the first time in recent memory, the current account deficit, which swelled in the third quarter of last year to $17.5-billion.
That was the eighth quarterly deficit since late 2008.
"Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities," the Bank of Canada said as it announced no change in the overnight rate.
"However, the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high."
The current account is the broadest measure of trade. As Globe and Mail economics reporter Jeremy Torobin wrote Wednesday, a deficit in the flow of trade and foreign investment can provide an early warning of a country taking on too much debt, while a surplus can show it doing little to stimulate domestic demand.
The Canadian dollar , while slipping yesterday on the Bank of Canada's comments, has been hovering over parity with its U.S. counterpart, and economists suggest further gains in the currency could prompt the central bank to hold off on raising interest rates. While rates are expected to remain unchanged for some time yet, the timing of the next rate hike has been a source of speculation.
"If you were looking for a sign from the Bank of Canada that it was uncomfortable with the Canadian dollar's recent trip through parity, look no further than Tuesday's policy statement," said BMO Nesbitt Burns economist Benjamin Reitzes.
"The bank specifically mentioned the current account deficit for the first time in recent memory, highlighting its 20-year extreme. The 'persistent strength in the Canadian dollar' and poor productivity performance ... were stated as the key reasons for the deterioration. The bank's apparent unease with the continued C$ strength suggest that a further appreciation could delay the next round of rate hikes beyond current expectations."
As for productivity, the Bank of Canada has "put it on its list" of threats to the economy, added Sal Guatieri, Mr. Reitzes' colleague at BMO.
Lagging productivity has been an issue that has dogged Canada for some time.
Over the past year, Canadian factories have actually outperformed those in the United States by driving labour costs down at a faster pace, Mr. Guatieri said, but he compared that to "the woeful underperformance" of the previous nine years.
"Any backsliding in productivity could worsen Canada's competitiveness, widen its current account deficit, detract from growth - and temper the monetary tightening cycle," he said.
Senior economist Pascal Gauthier of Toronto-Dominion Bank added that Mr. Carney and his colleagues appear "to have gone to lengths not to sound hawkish" in an attempt to spark another surge in the dollar.
Tuesday, January 18, 2011
What mortgage changes mean for you
If you already have a mortgage, you likely won’t be affected by new rules announced Monday by Finance Minister Jim Flaherty.
But you may feel the pinch if you’re already stretched to the limit and want to borrow more against your home by refinancing or by taking out a line of credit secured by your equity.
Starting March 18, you’ll be able to refinance only up to 85 per cent of the home’s value, down from 90 cent today. For a home worth $300,000, you’d get access to $255,000 by refinancing, compared to the $270,000 you’d get by refinancing at 90 per cent today.
The government has also limited the maximum amortization — the time it takes to pay off the entire mortgage — to 30 years, down from the current 35 years. This change is also effective March 18.
Finally, Ottawa will no longer allow home equity lines of credit to be backed by government insurance, starting April 18.
Here’s a guide to the new mortgage rules introduced in the past two years and why they’re necessary.
Q: Which changes have hit borrowers the hardest?
A: The Conservative government is embarking on its third round of mortgage changes.
In October 2008, it axed 40-year amortizations and “no money down” for insured mortgages. Homebuyers now needed a 5 per cent down payment and amortizations were capped at 35 years if your mortgage was insured by Canada Mortgage and Housing Corp. (CHMC) or a rival insurer, such as Genworth Financial.
(Mortgage insurance is mandatory if you borrow more than 80 per cent of a home’s value.)
You also needed a minimum credit score to qualify for an insured mortgage. (A credit score assesses the risk of problem borrowers, based on credit records.)
Last April, Ottawa brought in a second round of changes. Borrowers with insured mortgages had to qualify for a fixed-rate five-year mortgage, even if they eventually chose a variable-rate mortgage that required lower payments.
It also cut the refinancing limit for insured mortgages to 85 per cent of the home’s value (down from 90 per cent). That will drop again to 80 per cent this March.
The first reforms were most significant, says Jim Murphy, president of the Canadian Association of Accredited Mortgage Lenders; those after 2008 were just tweaks.
Q: Is the Harper government worried about a U.S.-style mortgage crisis?
A: Not really. It’s clear that Canadian banks had higher lending standards than U.S. banks and did not sell off mortgages to investment dealers (which took away a bank’s responsibility to ensure the loans were sound).
But Flaherty is nervous about the rising debt levels of Canadian households, which are starting to match U.S. levels. Mortgages are a large part of our total debt.
He wants Canadians to build equity and not use their homes as cash cows, to borrow against for even homes or a fancier lifestyle than they can really afford.
Mark Carney, governor of the Bank of Canada, is pushing for stricter limits too. He expects some borrowers could be in trouble when higher interest rates rise as the economy recovers.
Carney’s fear is misplaced, says Murphy. One-third of Canadian homeowners have no mortgages. And only half of the rest have insured mortgages — meaning their equity is less than 20 per cent of the home’s value.
His group will release a report Wednesday, based on an analysis of billions of dollars’ worth of mortgages, showing that higher rates will affect a minority of borrowers.
Last October, a TD Bank economic report estimated up to 10 to 11 per cent of households could be financially vulnerable if the Bank of Canada’s overnight rate rose to 3.5 per cent (from today’s 1 per cent).
While a major financial crisis isn’t brewing, TD said higher rates could hurt low-income families and many of those in the 55-plus age group, who were carrying heavier debt loads than in the past.
Q: Will the latest mortgage changes hurt the economy?
A: A rush to get 35-year amortizations before they disappear could boost real estate sales, but only temporarily. Economists expect 2011 to be a slower year than 2010 and house prices to be flat or weaken a bit.
Spending fuelled by home equity lines of credit — such as renovations, vehicles and debt consolidation — may fall as well. But few banks insure these HELOC loans.
Flaherty’s changes could relieve pressure on the Bank of Canada to raise interest rates, as long as inflation stays low. And that’s good news for mortgage borrowers.
But you may feel the pinch if you’re already stretched to the limit and want to borrow more against your home by refinancing or by taking out a line of credit secured by your equity.
Starting March 18, you’ll be able to refinance only up to 85 per cent of the home’s value, down from 90 cent today. For a home worth $300,000, you’d get access to $255,000 by refinancing, compared to the $270,000 you’d get by refinancing at 90 per cent today.
The government has also limited the maximum amortization — the time it takes to pay off the entire mortgage — to 30 years, down from the current 35 years. This change is also effective March 18.
Finally, Ottawa will no longer allow home equity lines of credit to be backed by government insurance, starting April 18.
Here’s a guide to the new mortgage rules introduced in the past two years and why they’re necessary.
Q: Which changes have hit borrowers the hardest?
A: The Conservative government is embarking on its third round of mortgage changes.
In October 2008, it axed 40-year amortizations and “no money down” for insured mortgages. Homebuyers now needed a 5 per cent down payment and amortizations were capped at 35 years if your mortgage was insured by Canada Mortgage and Housing Corp. (CHMC) or a rival insurer, such as Genworth Financial.
(Mortgage insurance is mandatory if you borrow more than 80 per cent of a home’s value.)
You also needed a minimum credit score to qualify for an insured mortgage. (A credit score assesses the risk of problem borrowers, based on credit records.)
Last April, Ottawa brought in a second round of changes. Borrowers with insured mortgages had to qualify for a fixed-rate five-year mortgage, even if they eventually chose a variable-rate mortgage that required lower payments.
It also cut the refinancing limit for insured mortgages to 85 per cent of the home’s value (down from 90 per cent). That will drop again to 80 per cent this March.
The first reforms were most significant, says Jim Murphy, president of the Canadian Association of Accredited Mortgage Lenders; those after 2008 were just tweaks.
Q: Is the Harper government worried about a U.S.-style mortgage crisis?
A: Not really. It’s clear that Canadian banks had higher lending standards than U.S. banks and did not sell off mortgages to investment dealers (which took away a bank’s responsibility to ensure the loans were sound).
But Flaherty is nervous about the rising debt levels of Canadian households, which are starting to match U.S. levels. Mortgages are a large part of our total debt.
He wants Canadians to build equity and not use their homes as cash cows, to borrow against for even homes or a fancier lifestyle than they can really afford.
Mark Carney, governor of the Bank of Canada, is pushing for stricter limits too. He expects some borrowers could be in trouble when higher interest rates rise as the economy recovers.
Carney’s fear is misplaced, says Murphy. One-third of Canadian homeowners have no mortgages. And only half of the rest have insured mortgages — meaning their equity is less than 20 per cent of the home’s value.
His group will release a report Wednesday, based on an analysis of billions of dollars’ worth of mortgages, showing that higher rates will affect a minority of borrowers.
Last October, a TD Bank economic report estimated up to 10 to 11 per cent of households could be financially vulnerable if the Bank of Canada’s overnight rate rose to 3.5 per cent (from today’s 1 per cent).
While a major financial crisis isn’t brewing, TD said higher rates could hurt low-income families and many of those in the 55-plus age group, who were carrying heavier debt loads than in the past.
Q: Will the latest mortgage changes hurt the economy?
A: A rush to get 35-year amortizations before they disappear could boost real estate sales, but only temporarily. Economists expect 2011 to be a slower year than 2010 and house prices to be flat or weaken a bit.
Spending fuelled by home equity lines of credit — such as renovations, vehicles and debt consolidation — may fall as well. But few banks insure these HELOC loans.
Flaherty’s changes could relieve pressure on the Bank of Canada to raise interest rates, as long as inflation stays low. And that’s good news for mortgage borrowers.
Monday, January 17, 2011
Will mortgage rules add chill to a cooling market?
STEVE LADURANTAYE
Just a few days ago economists gushed that the Canadian housing market had achieved a soft-landing - cooling off without crashing and returning to relative normalcy after a year of explosive growth.
That hasn't stopped the federal government from stepping in to make sure it stays that way. Changes to the mortgage rules - including a move to maximum 30-year amortizations instead of 35 years, and caps on home equity borrowing - will squeeze more marginal buyers out of the market.
It's already happened once - last year the Feds made it more difficult to qualify for a mortgage by forcing all borrowers to qualify at the five-year fixed rate, instead of the usually lower variable rate.
In practical terms - the changes to amortization lengths would add about $1,300 a year to the typical mortgage. Not huge, but enough to make someone think twice if they were already unsure if they could afford their new purchase.
The average Canadian resale home sold for $344,551 in December. Assuming a five-year mortgage at 4 per cent interest, and the minimum five per cent down payment of $17,227, a 35-year mortgage would have monthly payments of $1,441. Shorten the amortization period to 30 years, and the monthly payment increases to $1,555.
How much immediate effect that will have isn't entirely clear, of course, because there hasn't really been much evidence that Canadians are abusing longer amortization periods. The Canadian Association of Accredited Mortgage Professionals released a study late last year that showed 22 per cent of Canadians have mortgages with amortization rates exceeding 25 years, compared to 18 per cent the year before.
But the changes aren't necessarily targeted at today's market - the government wants to make sure Canadians are not taking advantage of record low interest rates to splurge on houses they won't be able to afford when rates inevitably start rising again.
Of course if this move proves heavy handed and freezes an already cooling market, interest rates will be the last thing those trying to sell homes will care about. They'll be more interested in finding out where all the buyers went.
Just a few days ago economists gushed that the Canadian housing market had achieved a soft-landing - cooling off without crashing and returning to relative normalcy after a year of explosive growth.
That hasn't stopped the federal government from stepping in to make sure it stays that way. Changes to the mortgage rules - including a move to maximum 30-year amortizations instead of 35 years, and caps on home equity borrowing - will squeeze more marginal buyers out of the market.
It's already happened once - last year the Feds made it more difficult to qualify for a mortgage by forcing all borrowers to qualify at the five-year fixed rate, instead of the usually lower variable rate.
In practical terms - the changes to amortization lengths would add about $1,300 a year to the typical mortgage. Not huge, but enough to make someone think twice if they were already unsure if they could afford their new purchase.
The average Canadian resale home sold for $344,551 in December. Assuming a five-year mortgage at 4 per cent interest, and the minimum five per cent down payment of $17,227, a 35-year mortgage would have monthly payments of $1,441. Shorten the amortization period to 30 years, and the monthly payment increases to $1,555.
How much immediate effect that will have isn't entirely clear, of course, because there hasn't really been much evidence that Canadians are abusing longer amortization periods. The Canadian Association of Accredited Mortgage Professionals released a study late last year that showed 22 per cent of Canadians have mortgages with amortization rates exceeding 25 years, compared to 18 per cent the year before.
But the changes aren't necessarily targeted at today's market - the government wants to make sure Canadians are not taking advantage of record low interest rates to splurge on houses they won't be able to afford when rates inevitably start rising again.
Of course if this move proves heavy handed and freezes an already cooling market, interest rates will be the last thing those trying to sell homes will care about. They'll be more interested in finding out where all the buyers went.
Friday, January 14, 2011
Tax-free accounts may be better than RRSPs
For many Canadians – particularly those with a low income – Tax-Free Savings Accounts (TFSAs) may be the best way to save for retirement, according to a report released Thursday by Jamie Golombek, tax and estate planning expert at the Canadian Imperial Bank of Commerce.
The report runs counter to the two-month-long rush at the beginning of each year known as RRSP season.
It shows that given identical tax circumstances, compounding, and dates of contribution and withdrawal, the amount of after-tax cash that can be accumulated within an RRSP or TFSA is identical.
Those who can afford to contribute to both an RRSP and TFSA should do so, but the reality is that most Canadians don’t have enough cash to do both each year, Golombek points out.
If you have a high income during your working years and expect that to drop in retirement, an RRSP may be best.
But if the opposite is true, a TFSA may be the better choice, Golombek writes.
Canadians typically rush to put money into an RRSP in order to qualify for a refund on their income taxes, a phenomenon Golombek calls “Blinded by the refund.”
“Conventional thinking seems to have steered most Canadians towards the tried and trusted plan, the RRSP, at the expense of the TFSA,” Golombek writes.
In the report, Golombek compares a $5,000 contribution to an RRSP. No tax is paid when the money is deposited. Assuming a 5 per cent rate of return, that would grow to $13, 266 after 20 years. If the tax rate at the time of withdrawal is 40 per cent, the net cash from that investment is $7,960.
Compare that to a $3,000 contribution to a TFSA – that’s $5,000 before the 40 per cent tax rate takes $2,000 off the top. It grows to $7,960 after 20 years with a five-percent annual return. Since no taxes are due when the money is withdrawn, the net cash from the investment doesn’t change – and is equal to the proceeds from the RRSP.
Here’s the worst part for those with a low-income in retirement: even modest withdrawals from an RRSP can affect government benefits and tax credits such as the Guaranteed Income Supplement (GIS), Old Age Security (OAS) Benefits, the Age Credit or the GST/HST credit.
The TFSA has a clear advantage here – since withdrawals from a TFSA are not considered to be “income,” they have no impact on those benefits.
Starting in 2009, Canadians ages 18 and over can contribute $5,000 a year into a TFSA. Those who open one this year can immediately contribute $15,000 because the unused contribution room from previous years accumulates.
Like an RRSP, investment income from the cash, stocks, bonds, or mutual funds held in the TFSA is not taxed.
Withdrawals from a TFSA can be made at any time for any reason, though you have to wait until the next calendar year to put the funds back in the account.
Contributions made to an RRSP reduce your taxable income – hence the tax refund – but taxes are due with your take out the funds at retirement.
Make withdrawals early or for a reason other than funding your education or buying your first home, and you’ll be hit with hefty withholding taxes.
And what about that tax refund from your RRSP?
Don’t think of it as a windfall, but simply the “present value of the future tax payment that will have to be made on the RRSP withdrawal,” Golombek says.
The best option is to consult a financial advisor or accountant who can help run the numbers and consider your unique situation.
“Ultimately, an individual’s specific financial circumstances and long term retirement goals will determine which vehicle is most advantageous,” Golombek said. “Perhaps with some financial guidance and a better understanding of how these new savings vehicles work, TFSAs may become the retirement vehicle of choice for many more Canadians going forward.”
The report runs counter to the two-month-long rush at the beginning of each year known as RRSP season.
It shows that given identical tax circumstances, compounding, and dates of contribution and withdrawal, the amount of after-tax cash that can be accumulated within an RRSP or TFSA is identical.
Those who can afford to contribute to both an RRSP and TFSA should do so, but the reality is that most Canadians don’t have enough cash to do both each year, Golombek points out.
If you have a high income during your working years and expect that to drop in retirement, an RRSP may be best.
But if the opposite is true, a TFSA may be the better choice, Golombek writes.
Canadians typically rush to put money into an RRSP in order to qualify for a refund on their income taxes, a phenomenon Golombek calls “Blinded by the refund.”
“Conventional thinking seems to have steered most Canadians towards the tried and trusted plan, the RRSP, at the expense of the TFSA,” Golombek writes.
In the report, Golombek compares a $5,000 contribution to an RRSP. No tax is paid when the money is deposited. Assuming a 5 per cent rate of return, that would grow to $13, 266 after 20 years. If the tax rate at the time of withdrawal is 40 per cent, the net cash from that investment is $7,960.
Compare that to a $3,000 contribution to a TFSA – that’s $5,000 before the 40 per cent tax rate takes $2,000 off the top. It grows to $7,960 after 20 years with a five-percent annual return. Since no taxes are due when the money is withdrawn, the net cash from the investment doesn’t change – and is equal to the proceeds from the RRSP.
Here’s the worst part for those with a low-income in retirement: even modest withdrawals from an RRSP can affect government benefits and tax credits such as the Guaranteed Income Supplement (GIS), Old Age Security (OAS) Benefits, the Age Credit or the GST/HST credit.
The TFSA has a clear advantage here – since withdrawals from a TFSA are not considered to be “income,” they have no impact on those benefits.
Starting in 2009, Canadians ages 18 and over can contribute $5,000 a year into a TFSA. Those who open one this year can immediately contribute $15,000 because the unused contribution room from previous years accumulates.
Like an RRSP, investment income from the cash, stocks, bonds, or mutual funds held in the TFSA is not taxed.
Withdrawals from a TFSA can be made at any time for any reason, though you have to wait until the next calendar year to put the funds back in the account.
Contributions made to an RRSP reduce your taxable income – hence the tax refund – but taxes are due with your take out the funds at retirement.
Make withdrawals early or for a reason other than funding your education or buying your first home, and you’ll be hit with hefty withholding taxes.
And what about that tax refund from your RRSP?
Don’t think of it as a windfall, but simply the “present value of the future tax payment that will have to be made on the RRSP withdrawal,” Golombek says.
The best option is to consult a financial advisor or accountant who can help run the numbers and consider your unique situation.
“Ultimately, an individual’s specific financial circumstances and long term retirement goals will determine which vehicle is most advantageous,” Golombek said. “Perhaps with some financial guidance and a better understanding of how these new savings vehicles work, TFSAs may become the retirement vehicle of choice for many more Canadians going forward.”
Tuesday, January 11, 2011
The Catch 22 of low interest rates, fat debt
MICHAEL BABAD
Some people want to know why the Bank of Canada would consider raising interest rates when high consumer debt levels are such a threat. Still others wonder why the central bank doesn't just go ahead and do it to discourage borrowers from taking on more than they can handle.
The answer, of course, is that the Bank of Canada looks at a lot of things in terms of overall conditions and policy, notably its inflation target of 2 per cent.
The central bank has been warning for months now that high consumer debt is worrisome, and very risky for those who can't juggle the costs when interest rates inevitably rise further. Yesterday, a deputy governor at the Bank of Canada explained why, as one economist has put it, policy makers have left the pantry open while saying 'hands off the cookie jar.'
Agathe Côté gave an audience in Kingston, Ont., a lesson in how low rates can juice a sputtering economy, by boosting lending and spending, and how that creates its own risks. But there, she warned, borrowers and their lenders should be the ones exercising caution.
"The bank recognizes that low interest rates, while necessary to achieve our inflation target, create their own risks," she said. "Prudence on the part of individuals and financial institutions is the first line of defence against these risks. Supervision of financial institutions can also be effective in limiting excessive concentration of risk. The development and use of selected macroprudential tools constitute another line of defence."
Household spending, representating about 60 per cent of demand in Canada, was crucial in getting the country out of recession, but now household finances have become "increasingly stretched."
Ms. Côté noted, as others have before her, that household debt has surged at twice the pace of personal disposable income since the depths of the recession. It now stands at 148 per cent of disposable income. Coupled with low rates, rising house prices and home-equity loans have also led to the growth in credit, and, in turn, spending.
These high debt levels are now a threat. If things go south, a shock could spread through the economy.
"Some have asked if increasing interest rates poses such a threat to households, why raise them?," Ms. Côté said. "Yet others have asked if household debt is such a concern, why not raise rates and discourage borrowing?"
The "cornerstone" of monetary policy in Canada is its inflation target. "In setting interest rates to achieve the inflation target, developments in household finances need to be weighed along with all the other factors influencing economic activity and inflation. Canadian monetary policy is set for overall macroeconomic conditions in Canada."
Ottawa has already brought in stricter mortgage rules, she noted, and the Bank of Canada's three rate hikes since the recession's end have served as a reminder to borrowers that cheap money won't last. That has started to have an impact.
"The BoC can only hope that its message is not being lost on deaf ears," senior economist Pascal Gauthier of Toronto-Dominion Bank said after Ms. Côté's speech. "At 148 per cent … and rising, the debt-to-income ratio is but one measure underscoring the need to pay close attention. By our calculations, economic and financial fundamentals suggest that a more sustainable debt-to-income ratio would lie around 138-140 per cent. Nonetheless, if debt grows in line with income, a policy response would not be needed. However, if debt outpaces income for another sustained period of time, targeted regulatory tightening may well be required to more firmly nudge households towards a more prudent path."
Stay informed on the latest lending rates.
Some people want to know why the Bank of Canada would consider raising interest rates when high consumer debt levels are such a threat. Still others wonder why the central bank doesn't just go ahead and do it to discourage borrowers from taking on more than they can handle.
The answer, of course, is that the Bank of Canada looks at a lot of things in terms of overall conditions and policy, notably its inflation target of 2 per cent.
The central bank has been warning for months now that high consumer debt is worrisome, and very risky for those who can't juggle the costs when interest rates inevitably rise further. Yesterday, a deputy governor at the Bank of Canada explained why, as one economist has put it, policy makers have left the pantry open while saying 'hands off the cookie jar.'
Agathe Côté gave an audience in Kingston, Ont., a lesson in how low rates can juice a sputtering economy, by boosting lending and spending, and how that creates its own risks. But there, she warned, borrowers and their lenders should be the ones exercising caution.
"The bank recognizes that low interest rates, while necessary to achieve our inflation target, create their own risks," she said. "Prudence on the part of individuals and financial institutions is the first line of defence against these risks. Supervision of financial institutions can also be effective in limiting excessive concentration of risk. The development and use of selected macroprudential tools constitute another line of defence."
Household spending, representating about 60 per cent of demand in Canada, was crucial in getting the country out of recession, but now household finances have become "increasingly stretched."
Ms. Côté noted, as others have before her, that household debt has surged at twice the pace of personal disposable income since the depths of the recession. It now stands at 148 per cent of disposable income. Coupled with low rates, rising house prices and home-equity loans have also led to the growth in credit, and, in turn, spending.
These high debt levels are now a threat. If things go south, a shock could spread through the economy.
"Some have asked if increasing interest rates poses such a threat to households, why raise them?," Ms. Côté said. "Yet others have asked if household debt is such a concern, why not raise rates and discourage borrowing?"
The "cornerstone" of monetary policy in Canada is its inflation target. "In setting interest rates to achieve the inflation target, developments in household finances need to be weighed along with all the other factors influencing economic activity and inflation. Canadian monetary policy is set for overall macroeconomic conditions in Canada."
Ottawa has already brought in stricter mortgage rules, she noted, and the Bank of Canada's three rate hikes since the recession's end have served as a reminder to borrowers that cheap money won't last. That has started to have an impact.
"The BoC can only hope that its message is not being lost on deaf ears," senior economist Pascal Gauthier of Toronto-Dominion Bank said after Ms. Côté's speech. "At 148 per cent … and rising, the debt-to-income ratio is but one measure underscoring the need to pay close attention. By our calculations, economic and financial fundamentals suggest that a more sustainable debt-to-income ratio would lie around 138-140 per cent. Nonetheless, if debt grows in line with income, a policy response would not be needed. However, if debt outpaces income for another sustained period of time, targeted regulatory tightening may well be required to more firmly nudge households towards a more prudent path."
Stay informed on the latest lending rates.
Wednesday, January 5, 2011
What retirement? More planning to work longer
More than two-thirds of Canadians plan to keep working after they officially retire, according to a survey by Scotiabank.
In Ontario, seven-in-10 plan to work during retirement the survey found with a little under half saying they would do so because they need the money. An even higher portion said they plan to work primarily because it keeps them mentally and socially active.
In terms of what retirees hoped to do with their time if not working, travelling and spending time with family and friends topped the list, followed by reading, exercising, taking up a hobby and going back to school.
The study also found that a little more than half of Canadians think they will need less than $1 million to have a comfortable retirement. Another 28 per cent think they will need between $1 million and $2 million.
“There's no magic number that Canadians should be aiming for, [but] it's important that Canadians are realistic,” Gillian Riley, a Scotiabank senior vice-president said.
When it comes to building a nest egg, about three-quarters (78 per cent) of those expecting to retire say they have been saving for an average of 15 years and are still putting money away.
Half of Canadians (55 per cent) who plan to retire report saving less than $20,000 over the past five years.
While the bulk of money for retirement will come from RRSP contributions and savings, many Canadians indicated their retirement would also be funded by money from the government, their work pension or inheritance.
About 5 per cent expect to earn a comfortable retirement from a lottery win and 4 per cent expect it to come from their children.
In Ontario, seven-in-10 plan to work during retirement the survey found with a little under half saying they would do so because they need the money. An even higher portion said they plan to work primarily because it keeps them mentally and socially active.
In terms of what retirees hoped to do with their time if not working, travelling and spending time with family and friends topped the list, followed by reading, exercising, taking up a hobby and going back to school.
The study also found that a little more than half of Canadians think they will need less than $1 million to have a comfortable retirement. Another 28 per cent think they will need between $1 million and $2 million.
“There's no magic number that Canadians should be aiming for, [but] it's important that Canadians are realistic,” Gillian Riley, a Scotiabank senior vice-president said.
When it comes to building a nest egg, about three-quarters (78 per cent) of those expecting to retire say they have been saving for an average of 15 years and are still putting money away.
Half of Canadians (55 per cent) who plan to retire report saving less than $20,000 over the past five years.
While the bulk of money for retirement will come from RRSP contributions and savings, many Canadians indicated their retirement would also be funded by money from the government, their work pension or inheritance.
About 5 per cent expect to earn a comfortable retirement from a lottery win and 4 per cent expect it to come from their children.
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