27 Mar

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BANK OF CANADA CUTS RATES 50 BPS TO 0.25%

Bank of Canada Moves to Restore “Financial Market Functionality”

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic (see chart below).

Strains in the commercial paper and government securities markets triggered today’s action to engage in quantitative easing. The Governing Council has been meeting every day during the pandemic crisis. Market illiquidity is a significant problem and one the Bank considers foundational. These large-scale purchases of financial assets are intended to improve the functioning of financial markets.

Credit risk spreads have widened sharply in recent days. People are moving to cash. Liquidity has dried up in all financial markets, even government-guaranteed markets such as Canadian Mortgage-Backed securities (CMBs) and GoC bills and bonds. The commercial paper market–used by businesses for short-term financing–has become nonfunctional. The Bank is making large-scale purchases of financial assets in illiquid markets to improve market functioning across the yield curve. They are not attempting to change the shape of the curve for now but might do so in the future.

These large-scale purchases will create the liquidity that the financial system is demanding so that financial intermediation can function. Risk has risen, which creates the need for more significant cash injections.

At the press conference today, Senior Deputy Governor Wilkins refrained from speculating what other measures the Bank might take in the future. When asked, “Where is the bottom?” She responded, “That depends on the resolution of the Covid-19 health issues.”

The Bank will discuss the economic outlook in its Monetary Policy Report at their regularly scheduled meeting on April 15. In response to questions, Governor Poloz said it is challenging to assess what the impact of the shutdown of the economy will be. A negative cycle of pessimism is clearly in place. The Bank’s rate cuts help to reduce monthly payments on floating rate debt. He is hoping to maintain consumer confidence and expectations of a return to normalcy.

The oil price cut alone would have been sufficient reason for the Bank of Canada to lower interest rates. The Covid-19 medical emergency and the shutdown dramatically exacerbates the situation. All that monetary policy can do is to cushion the blow and avoid structural problems to the economy. The overnight rate of 0.25% is consistent with market rates along the yield curve.

High household debt levels have historically been a concern. Monetary policy easing helps to bridge the gap until the health concerns are resolved. The housing market, according to Wilkins, is no longer a concern for excessive borrowing by cash-strapped households.

At this point, the Bank is not contemplating negative interest rates. Monetary policy has little further room to maneuver, given interest rates are already very low. With businesses closed, lower interest rates do not encourage consumers to go out and spend money.

Large-scale debt purchases by the Bank will continue for an extended period to provide liquidity. The Bank can do this in virtually unlimited quantities as needed. The policymakers are also focussing on the period after the crisis. They want the economy to have an excellent foundation for growth when the economy resumes its normal functioning.

Fiscal stimulus is crucial at this time. The newly introduced income support for people who are not covered by the Employment Insurance system is a particularly important safety net for the economy. There are many other elements of the fiscal stimulus, and the government stands ready to do more as needed.

The Canadian dollar has moved down on the Bank’s latest emergency action. The loonie has also been battered by the dramatic decline in oil prices. Canada is getting a double whammy from the pandemic and the oil price war between Saudi Arabia and Russia. The loonie’s decline feeds through to rising prices of imports. However, the pandemic has disrupted trade and imports have fallen.

The Bank of Canada suggested as well that they are meeting twice a week with the leadership of the Big-Six Banks. The cost of funds for the banks has risen sharply. CMHC is buying large volumes of mortgages from the banks, which, along with CMB purchases by the central bank, will shore up liquidity. The banks are well-capitalized and robust. The level of collaboration between the Bank of Canada and the Big Six is very high.

THE STOCK MARKET HAS HAD THREE GOOD DAYS

As the chart below shows, the Toronto Stock Exchange has retraced some of its losses in the past three days as the US and Canada have announced very aggressive fiscal stimulus. As well, the Bank of Canada has now lowered interest rates three times this month, with a cumulative easing of 1.5 percentage points. The Federal Reserve has also cut by 150 basis points over the same period. In addition to lowering borrowing costs, the central bank has also announced in recent days a slew of new liquidity measures to inject cash into the banking system and money markets and to ensure it can handle any market-wide stresses in the financial system.

The economic pain is just getting started in Canada with the spike in joblessness and the shutdown of all but essential services. Similarly, the US posted its highest level of initial unemployment insurance claims in history–3.83 million, which compares to a previous high of 685,000 during the financial crisis just over a decade ago. These are the earliest indicator of a virus-slammed economy, with much more to come. All of this is without precedent, but rest assured that policy leaders will continue to do whatever it takes to cushion the blow of the pandemic on consumers and businesses and to bridge a return to normalcy.

Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

9 Mar

DLC Coastal Mortgages March 2020 Newsletter

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What You Need to Know Before you Buy

Spring is one of the busiest seasons for retail activity as the good weather gives people lots of time for decluttering, showing the home, garage sales, packing and moving into your new space! Buying a home is an extremely exciting and fulfilling adventure, but before you get started let’s go through some of the most important things you need to know before you buy a home.

First things first, are you ready to own a home? This is likely the largest financial decision you will ever make and there are a few questions you can ask yourself to ensure you are ready:

  • Are you financially stable?
  • Do you have the financial management skills and discipline to handle this large of a purchase?
  • Are you ready to devote the time to regular home maintenance?
  • Are you aware of all the costs and responsibilities that come with being a homeowner?

If you answered ‘yes’ to the above questions, congrats! You’re on the right track. Let’s look at some of the most important things to know:

Securing Your Down Payment
A down payment is the largest, upfront cost that comes with purchasing a home. The minimum on any mortgage in Canada is 5 percent but putting down more whenever possible will lower the amount being borrowed. Note: If you are putting down less than 20 percent, default insurance will be mandatory to protect the investment.

If you have a nest egg of savings that you can apply towards the down payment, then you are ready to move on! If not, RRSPs can be a great resource towards a down payment for a first-time home buyer (up to $35,000). Another option is a gift from a family member, which requires a Gift Letter stating that the money does not have to be repaid and a snapshot showing that the gifted funds have been transferred.

If these are not options for you, then you can still work on ensuring you have a good credit score and determining your budget while saving for a down payment in the meantime.

Getting Your Credit in Order
Ensuring your finances and credit is in order will make it easier to qualify for a mortgage and can be done while you’re saving for your down payment. Ensuring good credit simply involves paying your bills on time (rent, utilities, car payments) and ensuring your credit cards are paid monthly as well as keeping the balance below 75 per cent of the available limit. If you’re new to the world of credit, consider the 2-2-2 rule. Lenders want to see two forms of resolving credit (ie: credit cards) with limits no less than $2,000 and a clean payment history for two years. Another important note is to avoid making any credit mistakes or other major purchases (such as a new car) until after you have mortgage approval and have closed the deal on your new home.

Don’t Use Your Maximum Budget
Temptation will always be to start looking at the very top of your budget, but it is important to remember that there will be fees, such as mandatory closing costs, which can range from 1 to 4% of the purchase price. Factoring these into your maximum budget can help you narrow down a home that is entirely affordable and ensure future financial stability and security.

Get Pre-Approved
A mortgage pre-approval determines the actual home price you can afford and is different from the pre-qualification in that it requires submission and verification of your financial history. A pre-approval can determine the maximum you can afford to spend, the monthly mortgage payment associated with your purchase price range and the mortgage rate for your first term. Getting pre-approved also guarantees the rate offered to you will be locked in from 90 to 120 days which helps if interest rates rise while you are still shopping.

Refinancing Your Mortgage

Spring is a great time for cleaning out your home and your finances. A part of this for many people includes refinancing your mortgage. There are a variety of reasons to refinance, which can range from wanting to leverage large increases in property value or get equity out of the home for renovations. In some cases it could be due to life events such as divorce, a new relationship, kids going off to college or simply consolidating debt.

Before you refinance, it is important to understand that if you do this during your term you will be breaking your mortgage agreement and there are penalties that come with that. If at all possible, it is best to wait until the end of the mortgage term before refinancing.

There are a few points to consider before refinancing:

  • You can tap into 80 per cent of the value of your home
  • You cannot qualify for default insurance which can limit your lender choice
  • You would have to re-qualify under the current rates and rules

Talking to a mortgage broker about refinancing can provide you access to even greater rates and mortgage products to best suit your needs and what you are trying to accomplish through your refinancing strategy.

Regardless of why you are looking to refinance, it can come with a host of great benefits when done properly!

  1. Getting a lower interest rate:Depending on where you are in your mortgage term, you could refinance to get a better rate – especially when done through a mortgage broker. A mortgage broker has access to hundreds of lenders and is able to find you the best rate versus traditional banks which only have access to their own rate.
  1. Consolidating your debt: When it comes to debt, there are many different types from credit cards to lines of credit to school loans to mortgages. However, many types of consumer debt have much higher interest rates than those you would pay on a mortgage. Refinancing can free up cash to help you pay out these debts. While it may increase your mortgage, your overall payments could be far lower and would be a single payment versus multiple sources. Keep in mind, you need at least 20 percent equity in your home to qualify.
  2. Change your term or get a different mortgage: The beauty of life is that it is ever-changing and sometimes you need to pay off your mortgage faster or change your mortgage type. Maybe you came into some extra money and want to put it towards your mortgage or maybe you are weary of the market and want to lock in at a fixed-rate for security.
  3. Tap into your home equity: One of the biggest reasons to buy in the first place is to build up equity in your home. Consider your home equity as the difference between your property’s market value and the balance of your mortgage. If you need funds, you can refinance your mortgage to access up to 80% of your home’s appraised value in cash!

Always remember – it is best to refinance when your mortgage term is up to avoid penalties. Talking to a mortgage broker can help clear up any concerns and they can walk you through the process depending on your needs.

Homeowner Tips

10 Spring Cleaning Tips

  1. Create a Playlist
    Everything – including Spring cleaning – is more fun with a great playlist! Not only is music great therapy but it can make the cleaning process go by quicker and make it more enjoyable.
  2. Clean One Room at a Time
    Most people dread Spring cleaning. Everyone likes the aftermath and seeing their home all sparkly and fresh but sometimes it can be an overwhelming process to get to that point. It is best to clean one room at a time, starting with the smaller ones or those that need the least amount of cleaning and work your way up to the larger, project rooms. Another great way to reduce stress over spring cleaning is to tackle one or two rooms each weekend for the month and by the time April comes, you’ll be ready!
  1. Declutter as You Go
    Spring cleaning isn’t just about shining up the brass on the door and dusting. It is just as important to declutter your space as you go! Before you start cleaning the room, it is a good idea to pinpoint items that can be discarded, such as old magazines and papers, as well as to go through closets and cupboards for anything that you can donate (like that sweater you bought and never wore). This will clear up space for new clothing and items and will make you feel that much more accomplished!
  1. Think Green!
    The idea of Spring cleaning is starting the season off on a fresh, clean note. Don’t muddy that up with harsh chemical cleaners. In today’s ecofriendly environment, there are many eco-friendly and safe alternatives to regular cleaners. Vinegar is a great substitute in the bathroom or kitchen as well as combining vinegar, baking soda and water as a deep clean alternative. You can also opt for a steam cleaner to manage tile, hardwood floors, appliances and even outdoor areas as they only use hot water and vapor. While not everything can be cleaned this way, it is best to minimize chemical cleaners as much as possible.
  2. Work From Top to Bottom
    Starting from the ceiling and working your way down just makes sense! This will force debris downward and save you having to re-clean your space. Dusting first will prevent a headache later too!
  3. Save Windows for a Cloudy Day
    Washing your windows after the build-up of winter grime is one of the biggest parts of Spring cleaning as you’ll want to wash them on the inside and outside. However, washing windows in direct sunlight (or using paper towel) can cause streaks. To minimize this and maximize your cleaning efforts, use a microfiber cloth and save this task for a cloudy day!
  4. Plump Up Those Pillows
    Fresh linens is one of the most rewarding things about cleaning, period. There is nothing quite like your face hitting a fresh, plumped up pillow and settling into a freshly flipped mattress. Washing your pillows with ½ cup of baking soda added to the detergent cycle will really get them extra clean! You can fluff them up even more by putting them in the air cycle of your dryer with two tennis balls in socks.
  5. Most of us are guilty of hanging onto old clothes that we haven’t worn in three years or a pair of jeans that we know we will never fit again, but just can’t let go of. Now is the time to say goodbye to those worn out, ill-fitting or stained clothes! There are many opportunities to donate old clothes that are still in good shape too. Not only does that lend a helping hand to individuals who may greatly benefit from them, but it frees up space in your closet for new items that you absolutely LOVE!
  1. Don’t Forget The Fridge & Freezer

The best time to clean out your fridge and freezer is right before you do your grocery shop, so they will be at their most empty. Take everything out and dispose of anything that is past its expiration date and any almost-empty items you won’t use. Before you restock be sure to wipe down the interior of the fridge with disinfectant and a damp cloth. The same can be done for the freezer but you’ll have to defrost it first!

  1. Clean Air Reduces Allergies
    Replacing furnace and HVAC filters is one of the most overlooked parts of Spring cleaning. Going as far as replacing your standard filter with a more robust one with a higher rating will help keep you even healthier (and allergy free!) this year as they catch smaller particles to ensure your home is void of allergens, chemicals and even odors.