Tag Archives: interest rates

It isn’t what it used to be: Prospects for interest rates and inflation

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When I talk to serious, successful investors, few ask, “Do you think the central banks will raise rates two or three times by a quarter-point before the end of the year?” or “Do you think inflation will hit 3% in the next year?” They are more likely to ask things like, “What are the chances that interest rates and/or inflation will get back up to the peaks of the 1970s/1980s?”

That is a much more important question.  A quarter-point change in interest rates or inflation is a fluctuation. A return to the peaks of the 1970s/1980s would be a disaster.

No one can predict the future, of course. The easy way out on the question would be to say, “Oh no, that could never happen again.” But the productive way to address a question like this is to look at those earlier decades and to try to figure out what was special about them.

It seems to me that in the years prior to those decades, three specific political/economic factors worked together to unlock a lot of pent-up demand for money, goods and services, and funnel it into a narrow timeframe where it could have great impact. These factors helped spur the rise in interest rates and inflation that followed.

The first factor was that, during four decades between the early 1930s and the early 1970s, the U.S. managed to fix the price of gold at around $35 U.S. per oz.

Greenback became a world currency in three crucial periods

This helped set up the U.S. dollar as something of a world currency during three crucial, historic periods: the 1930s depression, World War II and the post-war boom. The role of world-currency issuer let the U.S. expand its money supply without burdening itself with a heavy load of domestic inflation — not burdening itself right away, that is. But eventually the $35 gold peg gave way, like a dam that bursts when the force of a rising river becomes too much. The breaching of that $35 barrier helped set off a worldwide wave of inflation, as the value of the U.S. dollar withered in relation to the value of gold. Continue Reading…

How in sync are global Central Banks?

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By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

Without much fanfare, the U.S. Federal Reserve (Fed) provided its policy guidance late in May. Although no rate hike was implemented [it raised its overnight lending rate by 0.25% at 2 pm today, June 13, at 2 pm: Editor]  the money and bond markets fully expect the U.S. central bank to continue on its tightening path for the remainder of 2018, if not beyond. While the lion’s share of the focus has been Fed-centric on this front, it seems like a good exercise to check in on what the expectations are for the developed world’s other key monetary policy makers.

Heading into 2018, optimism for ongoing global growth seemed to be the norm. Indeed, along with the outlook for continued global growth, discussions were arising on whether central banks would soon turn their attention to any potential increase in inflation. While we still have almost seven months to go in this calendar year, recent data appears to be suggesting a plateauing of sorts on the economic front.

One economic indicator that is widely watched for help discerning economic trends on a global basis are the various Purchasing Managers’ Indexes (PMI) on a country or regional basis. While the levels being posted in the developed world still point toward further expansion, they don’t necessarily indicate a pick-up in growth prospects on the immediate horizon. In fact, the readings for April on an aggregate basis were relatively flat, and in some cases — such as the eurozone, the UK and Canada — have actually slipped a bit from their recent peaks.

So, what should investors expect in near-term global central bank policy? As illustrated in the table above, expectations for the upcoming policy meetings certainly differ quite a bit. The overarching outlook is for the Fed to raise rates at its convocation on June 13, with the Fed Funds Futures implied probability being 100%, as of this writing. The remaining four developed world central banks — the European Central Bank (ECB), the Bank of England (BOE), the Bank of Canada (BOC) and the Bank of Japan (BOJ)  — all fall in the “no rate hike” camp. Continue Reading…

Shopping for a Mortgage: 4 factors to consider apart from the Rate

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By Sean Cooper

Special to the Financial Independence Hub

Shopping for a mortgage in the near future? The mortgage rate matters, but it shouldn’t be the only factor you consider. There are so many factors to consider, yet homeowners often get fixated on this one factor.

When you’re shopping for bread at the supermarket, you most likely don’t just shop for the bread at the lowest price. You consider other factors, such as calories, sugar and nutritional value. So why do so many people do the same thing with their mortgage?

Mortgage rates should be one in a long list of factors. Your likelihood of breaking your mortgage is a lot higher than you think. Even if you get the lowest mortgage rate, if it comes with a hefty mortgage penalty, it’s probably not worth it. Let’s look at four factors to consider besides just the rate.

1. ) Penalties

It’s not a coincidence that mortgage penalties are number one. Mortgage penalties are such an important factor (perhaps more important than your mortgage rate), yet they’re one of the most overlooked factors. Here’s a stat that may change your mind: 6 out of 10 Canadians with a fixed rate mortgage break their mortgage at an average of 38 months in. Why do they break it? For many reasons:  job loss, illness, job relocation and divorce, to name a few.

If you have a variable rate mortgage, the penalties are pretty straightforward: 3 months of mortgage interest. However, if you have a fixed rate mortgage, that’s where things get a little more tricky; and costly. You’ll pay the greater of 3 months of interest or the interest rate differential (IRD). The IRD looks at the mortgage rate your lender is charging today on a similar term mortgage. If mortgage rates are a lot lower today, then that’s when you can be hit with a hefty IRD penalty by your lender.

To avoid a hefty IRD, ask your lender whether the IRD is being calculated using the posted or discounted rate. If it’s using the posted rate, be careful. If you break your mortgage and have a big balance owing, your mortgage penalty could amount to thousands or tens of thousands.

2.)  Portability

To avoid a hefty mortgage, it helps if your mortgage is portable. When your mortgage is portable, you can take it with you. For example, let’s say you’re living in Ontario and you get a job offer in B.C. If you sell your home in Ontario and buy a home in B.C, you can “port” or take your mortgage with you and avoid the hefty mortgage penalty. If the property that you’re buying in B.C. is more expensive, lenders often let you “blend-and-extend” your mortgage, which means you take your current mortgage and blend it with a new mortgage for the additional amount of financing you need.

A word of caution: all portable mortgages aren’t created equal. There are specific conditions that must be met in order for a mortgage to be ported. Sometimes the time window is tight, so ask your mortgage broker for all the details. Likewise, if you think there’s a possibility that you could transfer outside your province, avoid portable mortgages with credit unions. Credit union mortgages can never be ported outside the province you took them out, leaving you stuck paying the hefty mortgage penalty.

3.) Prepayment Privileges

Is your goal to be mortgage-free? Continue Reading…

52% of Canadians support new Mortgage Rules

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

It has now been four full months since Guideline B-20 – a slew of new mortgage qualification requirements – hit Canada’s borrowers in the wallet.

Under the new regulations, those applying for a new mortgage, and who are paying at least 20 per cent down on their home purchase, must qualify at either the Bank of Canada’s benchmark rate (currently 5.14 per cent), or their mortgage contract rate plus 2 per cent, whichever is higher. While the mortgage payments will be made at the borrower’s actual rate, this is the government’s way of shock-proofing lending, ensuring borrowers can still make their payments should rates rise exponentially.

Experts have stated that Guideline B-20 would slash the average home buying budget by 20 per cent, and knock as many as 10 per cent of buyers out of the market altogether. Market conditions have proven softer in the months following the new rule, with national prices falling 10.4 per cent in March, and an exodus from more expensive home types to the lower end of the market, such as condos for sale in Toronto.

But have they truly dissuaded Canadian home buyers from entering the real estate market?

To find out, Zoocasa polled just over 1,400 Canadians from all provinces, as part of the second-annual Housing Trends Survey. Respondents were asked for their sentiments and experiences as a result of B-20, and the overall rising interest rate environment.

Majority not impacted by Stress Test

According to the data, the majority of recent home buyers have withstood the introduction of Guideline B-20 unscathed; of those who purchased a home between October 2017 (when the new rules were first announced) and March 2018, 48 per cent say there was no change whatsoever to their buying timeline.

However, 27 per cent reported they rushed their purchase as a result, while 6 per cent delayed buying. An additional 19 per cent who bought homes weren’t actually aware of the new mortgage rules at all.

Also, the impact has been more significant on those who have no yet purchased their home: while 40 per cent stated B-20 hasn’t changed their mind about buying, 15 per cent will delay their home purchase, and a full 15 per cent now feel homeownership is out of reach altogether. Continue Reading…

Canadians miss out on $1,000 a year from Credit Card rewards, RateHub says

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By Alyssa Furtado, RateHub.ca

Special to the Financial Independence Hub

A whopping 86 per cent of Canadians say one of their top reasons when choosing a new credit card is earning rewards points or cash back, this according to a recent survey done by Ratehub.ca. 42% of those surveyed said they’ve never searched or compared credit cards to ensure they’re getting the maximum return.

Based on spending averages from Statistics Canada, that means Canadians could be giving up almost $1,000 rewards by not using one of the best credit cards available.

How is that possible? Well, when you look at some of the best credit cards in Canada, they offer up to 5% in cash back or rewards for certain categories. In addition, many cards offer a big sign-up bonus that could be worth anywhere from $250 to $500, so it’s not hard to see how some people are missing out.

Choosing a new credit card

With 29 per cent of those surveyed saying that the card they use most has been in their wallet for more than 10 years and another 50 per cent saying they would never pay an annual fee, perhaps it’s psychology that’s holding them back from making a change?

Continue Reading…