Economists are pretty much in agreement that the Bank of Canada, while still maintaining its interest rates at a stimulus-level 1.00%, also adopted a more hawkish tone in its latest comments.

Mark Carney, governor of the central bank, highlighted an improving global economic outlook while also noting that household debt burdens have become the biggest domestic risk. Enough grist for the mill, certainly, for economists to begin speculating about Mr. Carney accelerating his plan to eventually raise rates again. At some point in the future. Possibly. (You know how it is).

While quite subtle, the associated rate statement signalled a possible lack of patience with the status quo,” Mark Chandler, head of Canadian fixed-income and currency research with RBC Capital Markets, said in a note Friday.

However, the real question is what Mr. Carney plans to do about the growing debt problem.

“Over the past couple years, the presumption had been that household debt accumulation was largely a sector-specific problem tied to housing prices and associated mortgage credit growth,” Mr. Chandler said.

Problem was, direct measures introduced in the past two years, including lowering the maximum amortization period to 30 years and requiring borrowers to qualify for at least a five-yeare fixed-rate term even if they choose a lower rate or term, have been largely ineffective at pushing the debt needle back.

“One can argue that additional capital requirements should be part of the solution (as per Basel III) but financial institutions are already scrambling to build core capital requirements required under the new rules,” he said. “If the macro-prudential tool is unavailable, the burden could (or should) fall to monetary policy.”

On the other hand Sheryl King, Canada economist with BofA Merrill Lynch, argues against a rate hike due to its likely negligible impact on bond yields, which are used by the banks to determine mortgage rates. Bond yields have been weak ever since investors, fearful of roller-coaster equities in the wake of the financial crisis, have been flocking to fixed income for guaranteed yield.

“The more effective and direct policy tool for the mortgage market, in our view, is tighter regulation,” she said.

For example, if Canada further reduced its maximum amortization period to 25 years from 30, it would be the equivalent of a 95 basis-point rise in the five-year fixed rate mortgage.

The U.S. Federal Reserve, which faced a similar conundrum under the stewardship of Alan Greenspan between 2004 and 2006, was only able to achieve similar results through a 400 bps increase in the rate, she said.

Fixed-rate mortgages are at historic lows but if you are locked in to a contract with your bank, those benefits may be yet elusive.

First you have to do the math to see if breaking your contract is worth the penalties you may face.

“There is no grey area,” says Cindy David, a certified financial planner at Dupuis Langen Financial Management Ltd. in Vancouver. “It’s either worth it or it’s not.”

The big five banks are offering four and five year mortgages at just 2.99%.

“We’re even seeing 10-year fixed rate mortgages at 3.99%,” says Ms. David. “Think about that: Interest and principal at 3.99% for 10 years. From a financial planning perspective if any client approached me and said ‘Should I look into breaking my mortgage?’ My answer would be yes.”

Step one comes down to meeting with your financial institution and doing the math to determine whether or not the cost of breaking your mortgage is worth the anticipated savings from the lower rates. The fact is the penalty for breaking a mortgage can be thousands of dollars and in many cases, the cost and the future savings cancel each other out, in which case you may be wise to wait until your mortgage is up for renewal

OTTAWA • The federal government and some of the country’s leading economists remain worried about Canada’s housing market and rising household debt, and are cautioning Canadians against borrowing too much.

However, they are more optimistic about the overall state of the Canadian economy than they were just last fall, and now project stronger-than-expected economic growth in 2012.

Finance Minister Jim Flaherty met Monday with 13 private-sector economists for his traditional pre-budget consultation to get their assessment of the economy as Ottawa prepares to deliver the federal budget on March 29.

Mr. Flaherty and a handful of the economists said they continue to be concerned about household debt levels in Canada and a somewhat overheated housing market — especially on condominiums. The Minister was also cautioned about cutting more than $4-billion in annual spending that the government first identified last year.

Some of the big banks are suggesting the federal government also consider implementing “measured actions,” such as reducing the maximum amortization period for mortgages back to 25 years and increasing the minimum down payment, possibly to 10%.

“There has been some moderation in the housing market. I remain concerned about the condo market, quite frankly,” Mr. Flaherty told reporters after his one-hour meeting in Ottawa.

“I again encourage Canadians to be careful in the amount of debt they take on in terms of residential mortgages because (interest) rates will go up some day.”

The Minister, however, noted there’s a “divergence” in opinion among the economists, as some expressed more concern than others about the state of the housing market.

Avery Shenfeld, chief economist at CIBC World Markets, echoed some of Mr. Flaherty’s worries and said that while there are signs the housing market is cooling off, there’s still cause for concern.

“There’s a general feeling that, more than just the condo market, the Canadian housing market is starting to get a little bit overdone in terms of price momentum,” Mr. Shenfeld said.

He noted the Canadian economy in 2012 is likely to expand a few decimal points more than the 2.1% growth in real gross domestic product that was predicted in November’s fall economic update.

“It’s fair to say that some of the risks we were worried about last year don’t seem quite as shocking as we go into the current year,” Mr. Shenfeld said.

The federal government bases its budget and economic projections on the average forecasts of private-sector economists it regularly consults. The economists said they’re waiting a few more days for the most recent GDP figures to trickle in before releasing an updated average.

Derek Burleton, deputy chief economist at Toronto-Dominion Bank, said he also is worried about the state of the Canadian housing market and would like the government to consider reducing the maximum amortization period to the traditional 25 years from the current 30 years.

Increasing the minimum down payment to 10% from the current 5% is another option, he said, but one that must be carefully considered.

“I do believe that there is some scope to take some further measured actions. I am concerned about the condo market quite a bit,” Mr. Burleton said.

Reducing the maximum amortization to the traditional 25 years wouldn’t generate any drastically negative impacts, he said. The government had increased the maximum period to 40 years, but slowly ratcheted it back over the past few years to the current 30 years.

Mr. Burleton also noted borrowing trends have picked up in recent months after a cooling-down period, and is worried the uptick will continue.

Douglas Porter, deputy chief economist at BMO Capital Markets, cautioned the government against searching for more than the $4-billion in annual cuts the Conservatives identified in last year’s budget.

The Harper government’s program review is searching for a minimum $4-billion — and up to $8-billion — in annual savings over the next few years, but Mr. Porter said the government should tread carefully.

“I would not advocate for the federal government to ramp up the pace” of cuts beyond what was already announced in last year’s budget, Mr. Porter said, adding federal finances are now in better shape.

“There is not a push from the financial markets for the federal government to do any more than what’s already scheduled.”

However, Mr. Porter is not as skeptical of the Canadian housing situation, saying the markets remain fairly well-balanced across the country.

“I don’t get the impression that the housing market has been particularly overdone,” he said.

Posted in: Economy  Tags: Canada economy, Jim Flaherty

Three annoying things that banks do to customers are about to become history.

Following up on commitments made in the past two budgets, the federal government has announced measures that will stop banks from mailing unsolicited credit card convenience cheques to customers, and that will reduce the holding period on newly deposited cheques. The banks will also have to stop being so secretive about the penalties clients must pay when they want to get out of a mortgage early.

These measures represent some good work by a government that has been under pressure lately as a result of the robo-call affair. Strangely, the measures were announced on a Sunday and thus didn’t get the initial attention they deserve.

The sharp decline we’ve seen in mortgage rates over the past few years has prompted many people to think about breaking their mortgages in order to lock in lower borrowing costs. A mortgage penalty must generally be paid in this situation, but it’s exceedingly difficult to find out how much it is and how it’s calculated.

The government said in its 2010 budget that it would standardize the calculation and disclosure of mortgage penalties. The measures just announced don’t address the fact that mortgage lenders use different methods to calculate penalties, some of which hit borrowers harder than others. But they do require banks to:

• Annually show customers how they can pay off their mortgages faster without incurring prepayment charges.

• Provide online mortgage penalty calculators.

• Offer a toll-free phone line that customers can call to talk to bank staff about mortgage prepayment penalties and find out the actual charge that would apply.

• Disclose the details of how actual mortgage prepayment penalties are calculated (example: whether three months’ interest is being used, or a calculation called the interest rate differential that looks at how much interest a bank is losing out on if you break your mortgage).

These rules will be introduced over the next six to 12 months or so, and they apply specifically to new mortgages. The Department of Finance says the measures will be applied to existing mortgages “where it is feasible to do so.” Business mortgages are not covered.

Improved disclosure of penalties will make life easier for borrowers who want to get out of a mortgage before the renewal date. “I can’t tell you how many borrowers call us to say, ‘How can I figure out my penalty?’” said Vancouver mortgage broker Robert McLister. “We generally have to tell them to call their lender, and then they have to endure a sales pitch from the lender – why are you leaving and things like that.”

The new mortgage regulations will require banks to show how they arrive at a mortgage prepayment penalty. However, they don’t standardize the calculation method. As it stands now, some lenders are more punitive than others with their penalties. For example, mortgage broker Jim Tourloukis said some lenders will calculate a penalty of three month’s interest based on the actual interest rate a client has, while others will use the higher posted rate that almost nobody pays.

“Without a doubt, the calculations should be standardized,” Mr. Tourloukis said. “It’s a dog’s breakfast right now.”

The government’s ban on the distribution of unsolicited credit card convenience cheques will come in proposed regulations to be published for consultation in the weeks ahead. Let’s hope there’s no slippage on this file because credit card convenience cheques exist to prey on people who can’t handle credit (here’s a column I wrote last fall on these cheques.)

Some key negatives: These cheques allow you to draw on your credit card balance for things that you can’t usually pay for with plastic, like rent or utility bills, and using them is like taking a cash advance on your card. That means you forgo the usual interest-free grace period credit cards offer.

The new rules for cheques take effect Aug. 1. They’ll limit banks to a four-day hold on newly deposited cheques of less than $1,500, which is down from five to seven days right now in many cases. Also, banks will have to provide immediate access to the first $100 deposited in a branch; for cheques deposited by bank machine, access to the first $100 would come the next business day.

That’s three annoying bank practices addressed by Ottawa. Suggestions for future government investigation: Aggressive marketing of bank mortgage life insurance, high dormant-account fees and branch staff who are called financial planners but only flog mutual funds.

Canadians will have to wait another month before finding out how the Conservatives will change Old Age Security and cut federal spending, as Finance Minister Jim Flaherty confirmed his 2012 budget will be released March 29.

Even then, after months of hints and suggestions about what may be on the chopping block as Ottawa moves to erase its estimated $31-billion deficit, there will still be questions about what is being cut.

Last March, the Conservatives launched a year-long process called the Deficit Reduction Action Plan, led by a special subcommittee of cabinet that scoured through hundreds of proposed cuts from all federal departments. The 2012 budget was billed then as the unveiling of that work.

But Mr. Flaherty said his budget will not include “intricate detail” about where the axe will fall.

“The budget would have to be a 1,000 pages if we did that,” he said. “But there’ll be enough information that it’ll be comprehensible, that it will describe what we’re doing in terms of the Deficit Reduction Action Plan, and much more than that. This is a jobs and growth budget.”

He and other ministers have been playing down expectations lately, describing the government’s restraint plans as modest.

The budget will also reveal how Ottawa will phase in changes to Old Age Security, which the government says is needed over the long term to make it financially sustainable.

Mr. Flaherty promised the budget will nonetheless lay out a comprehensive plan for meeting the government’s target of eliminating the deficit by the 2015-16 fiscal year. The minister said it’s possible Ottawa could “do a bit better,” which could mean a balanced budget by 2014-2015. That later target is what the Conservatives announced during the 2011 election campaign, but Mr. Flaherty pushed that back by a year last November on the grounds that economic growth was coming in lower than expected.

NDP finance critic Peter Julian accused the government of trying to “hide the facts from the public” and said the minister’s actions are the exact opposite of Conservative campaign pledges to act transparently.

Liberal finance critic Scott Brison said that he recently urged Mr. Flaherty in a private meeting to be transparent about the budget cuts. He expressed disappointment that the minister’s comments suggest that won’t happen.

“It’s regrettable, but it’s not surprising,” Mr. Brison said.

Public-sector unions are warning that more than 100,000 public- and private-sector jobs could be lost as a result of federal spending cuts, a claim Mr. Flaherty dismissed as “outrageous.”

Police were ramping up security on Parliament Hill in advance of a union-led national “day of action” Thursday to protest federal spending cuts.

Mr. Flaherty told reporters unions have been protected during difficult economic times and that it was “realistic” to “ask the public service to participate in the belt-tightening.”

There is disagreement among economists over how quickly Ottawa should move to eliminate the deficit, with some worried that too aggressive an approach might drag down a fragile recovery. Finance Canada’s monthly tracking suggests the deficit for the current year will come in at about $25-billion, beating the minister’s November estimate of $31-billion.

But a broader public is more bullish on cuts. A poll by Nanos Research released this week showed that 74 per cent of those surveyed want to see cuts that exceed the 5-per-cent minimum the Conservatives have set as each department’s target.

The last week in March is later than usual for a budget, but Mr. Flaherty has said he wanted to give himself time to see how the Greek debt crisis plays out in case it creates a shock to the global economy.

The last week of March could be budget-heavy. Ontario Finance Minister Dwight Duncan also plans to bring down his budget that week, which could provide interesting contrasts as to how each government tackles its fiscal challenges.

“In theory it would be possible” that Ontario releases its budget the same day as Ottawa, Duncan spokeswoman Aly Vitunski said. The province usually releases its budget on a Thursday, but “it doesn’t have to be,” she added.