Back in 2011, they tried to get the Interest Rates back to something a bit more normal. They failed. The new Mortgage Rules were really going to change things too. That failed too.
Here Comes Da Recovery!
Bank of Canada announced yesterday that they will not be raising their key overnight rate this month, which is always good news for those who are carrying debt (and bad news for those supplying the money to finance the debts).
The reason given is optimistic globally, and not so much on the Canadian side of things:
The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand. The contribution of government spending is expected to wind down this year, consistent with announced fiscal plans. Stretched household balance sheets are expected to restrain the pace of consumption growth and residential investment. In contrast, business investment will likely continue to rebound strongly, owing to stimulative financial conditions and competitive imperatives. Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities. 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.
That is an interesting analysis of how Canada may proceed, and some interesting commentary about Canada becoming a consumer country instead of a producer (which it traditionally has been).
A cautionary comment at the end of the release makes you wonder too:
Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.
So we still need the stimulus of low interest rates, for now. Good to know, but I suspect rates may start creeping up this summer, so now is the time to start lowering your debt loads, while the rates are lower.
New Mortgage Rules too
Many fin bloggers have been talking about the new Mortgage rules that were introduced in legislation this week as well. The quick overview is (to quote the official release):
* Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
* Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
* Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.
The HELOC one is interesting as well. Is this the same as a Secured Line of Credit (secured against your home)? Any fin bloggers caring to enlighten me, please feel free to comment!
I can’t believe they don’t do something about the spread between the bank of Canada rate and credit card interest. The rate of 20 – 25% on some cards is INSANE! And the maximum interest rate allowed by law is 60%. The banks and credit card companies are quick to jack up the rates when the federal rate creeps half a percent but do nothing when the rate goes down.
Hey BCM
The BoC has been talking “careful consideration” since they last raised rates in the summer of 2010.
As per the HELOC – yes, this is a secured line of credit against a house – up to 80% of the value of the house (that you’ve paid off). While Carney mentioned people using their homes as equity for “boats and TVs” many homeowners use this equity for home improvements while others (us included) use the equity as leverage to invest and ultimately turn our non-tax-deductible mortgages into tax-deductible investment loans. Google: Smith Manoeuvre (or just head over to Million Dollar Journey, you’ll find the reading material there quickly enough).
We too are concerned about the HELOC change. I simply don’t see the greedy banks not increasing the rates on HELOCs as they will have to insure these loans themselves instead of CMHC doing so. Banks always pass costs onto us, the customer. You never hear them say “we’ll suck up those fees for you, valued customer” – NEVER.
That was kind of my thinking as well, but the Canadian Capitalist wrote that he didn’t think it would change things, maybe market pressures will cause the banks to not change things? We’ll see.
Might mean I have to go back to a Standard Mortgage.