Nearly a third of young Canadians have not started saving for retirement, although a quarter of them want to leave the work force early. A poll released Wednesday by the Bank of Montreal found that 27 per cent of young adults, defined as those between the ages of 18 and 34, say they have not started saving for retirement. Furthermore, only 10 per cent have “thought a lot” about how much money they will need to have stashed away for their golden years although one-quarter of them expect to retire early

Nearly a third of young Canadians have not started saving for retirement, although a quarter of them want to leave the work force early.

A poll released Wednesday by the Bank of Montreal found that 27 per cent of young adults, defined as those between the ages of 18 and 34, say they have not started saving for retirement. Furthermore, only 10 per cent have “thought a lot” about how much money they will need to have stashed away for their golden years although one-quarter of them expect to retire early

The news wasn’t all bad. More than half of those polled by BMO – 52 per cent – own a registered retirement savings plan and just over a third, or 36 per cent, have a tax-free savings account. And a vast majority – 82 per cent – believe retirement planning is important. The BMO poll of 1,000 Canadians was conducted online by Leger Marketing in February.

Tina Di Vito, head of the BMO Retirement Institute and the author of a book on how to rescue your retirement, said young Canadians need to start take concrete steps now. “A clear dichotomy exists between what young people think about retirement and what they are actually doing to prepare for it.”

The BMO release noted, however, that today’s young people face significant financial challenges. “Factors that may hinder their progress in establishing themselves financially, in general, let alone for retirement, include poor post-economic recession job prospects, rising student debt and lower real wages.” Alexandra Macqueen, a certified financial planner and co-author of the book Pensionize Your Nest Egg, says the findings are not surprising. “At that age, retirement is just not on people’s decision horizon.” She believes that even at 35, many Canadians are still grappling with other financial issues – such as how to pay down their mortgage, student loans and pay for daycare.

Despite the benefits of compound interest, she says not having any retirement savings at a young age is no reason to panic. “As long as you keep your lifestyle expenses low and then build savings as you age, you should be fine,” she says. Ms. Di Vito says it is up to parents and other influential adults to encourage young people to think about their financial future. She offered these three tips for parents:

1) Start early
Involve kids in their tween and pre-teen years by talking to them about saving and setting financial goals. Open a Registered Education Savings Plan for them, make regular contributions and teach them about the power of compound tax-deferred growth.

2) Hold them accountable
If adult children are working but living at home, discuss their financial contribution toward general household expenses; perhaps even charge them rent. If asking for rent makes you feel guilty, consider investing the “rent” money in a separate account and then surprise them with a monetary gift at a later date to use for their wedding or for a downpayment on a home.

3) Speak their language
Instead of using words like “retirement planning,” make the future more relevant with phrases like “save money for tomorrow.” These interactions will need to take place using their preferred channels of communication such as smartphones and social networking websites.

Bank of Canada governor Mark Carney has been warning about the high level of consumer debt in Canada since 2011, and this advice has been largely ignored.

Canadian consumers’ debt levels today are by any measure higher than they have ever been. The irony is that we are on the cusp of the second phase of the financial crisis that began in 2008 and, this time, Canadians are more vulnerable than Americans or even the Europeans.

We knew the cause of this financial crisis when it arrived in 2008. The previous 20 years, consumers in the Western world had embarked on a spending binge financed by debt.

Consumers piled on unprecedented levels of debt to purchase their homes, investment properties, cars and anything else the banks and credit card companies would finance. Economic reality arrived in 2008, initially in the U.S., and the rest is history.

We do not need to be financial experts to understand that if we keep eating tomorrow’s lunch today, then when tomorrow arrives, there is no lunch. Consumers faced that moment in 2008. The world’s financial system almost went off the cliff. We know how we pulled back from the brink: The U.S. and other economies bailed out the banks and stimulated their economies with trillions of dollars of freshly created debt.

Of course, we never really solve a debt problem by creating more debt, although this is a good Band-Aid that kicks the can down the road. However, now, as we see in Europe (and soon in the U.S.), the governments have too much debt and are finding it difficult to borrow more without paying very high interest rates.

The question that needs to be asked is, who bails out the governments? After 19 economic summits in two years, Europe is still trying to figure this out.

‘It was debt that caused the crisis to begin with and, in Canada, we are happy to ignore the lessons’

And what of the Canadian consumer — what has he been doing while the euro Titanic struggles to stay afloat? China’s response during the economic crisis was to undertake a huge spending binge, building new cities, malls, office towers and condos. This lifted the commodity prices that had crashed and cushioned Canada’s downturn.

We should remember that oil prices had sunk to $40, and the other resources responded in a similar fashion. In a way, this has given Canadians a false sense of security. While house prices have been crashing in the U.S. and Europe, Canadians have gone on a borrowing binge, bidding up house prices to frothy levels completely oblivious of the reality.

Canadians look at the news that emerges daily from places such as Greece, Portugal and Spain as if these events are taking place in a far distant galaxy. Huge austerity measures and 25% unemployment rates in some of these countries have done little to temper the Canadian consumer’s appetite for debt.

It was debt that caused the crisis to begin with and, in Canada, we are happy to ignore the lessons. That is, of course, until the same movie arrives in Canada.

Canadian consumers should be aware that “GREECE R US” will probably arrive by 2014. This is not a prophecy, just economics.

Europe represents almost 25% of the world’s trade, and Europe is in a recession that is getting worse by the day. The U.K. is also in a recession, while the powerhouse economies of China, Brazil and India are decelerating so fast that we can see the skid marks.

Finally, look at the U.S. economy. We see it muddling through with the risks of a recession rising by the day. The International Monetary Fund has once again reduced its growth forecasts and issued the following statement: “Growth in most major economies has showed signs of slowing in recent months, partly due to Europe’s chronic debt crisis and economic malaise.”

This is stating the obvious. So what we have taking place right in front of our eyes is a synchronized global economic slowdown.

The fact this is happening at a time when interest rates are almost at zero in the U.S. and Europe, and that the Western governments are already burdened with too much debt, which limits what they can do, should be a warning sign to everyone, especially the Canadian consumer.

‘Canadians will be going into a very slow economic period, and maybe even a global recession, with unsustainable debt levels’

Here it is in plain English: Every economy we trade with is slowing down, and this will impact us more than most. Why? Because Canadians will be going into a very slow economic period, and maybe even a global recession, with unsustainable debt levels.

The high debt levels will have a magnified effect as unemployment increases during the slowdown, and house prices start to drop from their overinflated valuations.

Our federal government obviously doesn’t get it. In fact, besides tinkering with the mortgage amortization, it has done little to prepare Canadians. So Canadians would be wise to take proactive steps to anticipate and prepare for a crisis that is heading to Canada.

The best thing Canadians can do is go back to the basics of prudence and financial management. Recessions come and go; it is the weak hands that get into trouble.

Here is a checklist:

– Build up a safety nest of at least six month’s expenses.

– Don’t live within your means, live below your means. The bigger the margin, the more you save.

– Get rid of debt. If you have investment properties, consider selling them as soon as possible, as this winter may be too late.

– If you have a mortgage on your home with a floating rate, consider locking in the rate for between three to five years. Similarly, with lines of credit that you cannot pay off. Interest rates may jump without warning.

– Pay off your higher interest rate debt, such as credit cards, first.

– Look for a secondary source of income to increase your safety net, such as a part-time job or by renting out an eligible basement.

– Expect a lot of volatility in the stock markets. If you have money invested in the markets that you may need soon, you shouldn’t be in the market.

– We are entering an age of frugality, so be frugal, but not cheap.

– It would be wise to put off big-ticket purchases and make do with what you have.

– If you are considering selling your home to buy another, make sure yours is sold first or you risk being stuck with two homes and extra debt in an uncertain economy.

– Think twice about quitting your job.

– Reconsider whether you need all the cars you have. Each car has hidden costs.

With yields on Canadian and U.S. bonds at their lowest levels in a generation, the only direction for interest rates would seem to be upward.

But investors and savers may be waiting far longer than they expect for those higher rates.

A weakening global economy, combined with a flood of money from safety-seeking investors has dragged borrowing costs dramatically lower over the past year and a half. Neither trend shows signs of reversing direction and long-term yields could have even further to fall before the trend to lower rates that began more than three decades ago finally hits bottom.  “I don’t think [that falling yields are] over by a long shot,” said Lacy Hunt, an economist at Hoisington Investment Management Co. in Texas.

Low bond yields are important because they set the stage for borrowing costs across the broad economy, from mortgage rates to the payouts on savings accounts. They make it easier for governments to finance large deficits and for borrowers to support their debt loads, but punish savers with paltry rewards for thrift.

Bond prices move in the opposite direction to bond yields, so falling yields would mean more profits for bond investors. However, they would also create pain for pension funds and insurance companies that must fund long-term obligations with bonds that are paying less and less.

Bond yields have been tumbling for years. In Canada, 10-year federal government bonds paid over 11 per cent as recently as 1990, but hit a record low below 1.6 per cent last week.

Back in 1981, with inflation at full roar, 30-year U.S. Treasuries offered a lush 15.21-per-cent payout. This week, it was a scant 2.6 per cent.

Gary Shilling, president of A. Gary Shilling & Co., a New Jersey-based money manager, and Mr. Hunt both believe that yields on long-term U.S. government bonds will eventually bottom out at 2 per cent.

Mr. Shilling, who made a name advising investors to load up on Treasuries back in 1981, says bond yields will fall because of the global economic slowdown, a flight to quality by investors fearful over the safety of their money, and a turn to deflation, or falling consumer prices.

He’s confident bonds aren’t yet in the irrational buy-at-any-price stage that typically signifies the end of a bull market because so many investors remain skeptical that yields can go lower. Bonds, in his view, remain a contrarian play.

“At every step of the way down in yields and up in price, the consensus has been: ‘Okay, it can’t last, yields can’t go any lower,’” he observed.

That consensus remains in place. A survey by Bloomberg News shows that economists expect the 10-year Canada bond rate to climb to more than 2 per cent by year-end. It closed Friday at 1.613 per cent.

In contrast, Mr. Shilling said, bond yields will inevitably be pulled lower by a faltering global economy. Europe is already in a downturn, while China’s growth rate is slowing.

In the U.S., retail sales have fallen for the past three months. On 25 of the 27 occasions since the late 1940s that retail sales have fallen three months in a row, the U.S. was either in recession or within three months of the start of one, he says.

Another factor that may drive down yields in North America is an inflow of skittish cash from Europe. A Statistics Canada report last week showed record purchases of Canadian securities by foreign investors in May. Even German government bonds, currently considered a haven, could lose their lustre because the country is exposed to European bailout costs, Mr. Shilling said.

If deflation breaks out, Mr. Shilling said consumer prices may start falling by about 2 per cent a year, which means that even with a lowly yield of 2 per cent, U.S. Treasuries would still be decent investments providing a real return of around 4 per cent annually. This would echo the experience of Japan, which went into a deflationary funk after its economy tanked in the early 1990s and where 10-year government bonds now pay a nearly invisible 0.74 per cent a year.

Mr. Hunt based his yield forecast on the history of the bond market after previous debt-induced financial panics. After the panic of 1929 and a similar collapse in 1873, “long bonds” with 30-year maturities eventually bottomed at 2 per cent yields, with the lowest point reached 14 years after the crash. In both cases, interest rates were still around the 2.5 per cent level 20 years after the beginning of the panic.

If the current blowout dating from the 2008 collapse of Lehman Bros. follows the same script, yields could stay low for far longer than is widely expected. “You go down there and then you bounce along the lows for a long time,” Mr. Hunt said.

Existing home sales dropped 1.3% in June from the month before and were down 4.4% from the year before, suggesting that Canada’s housing market was already cooling before Ottawa tightened mortgage rules.

The national average home price in June was $369,339, down 0.8% from the same month last year, Canadian Real Estate Association reported Monday.

“Even before the new mortgage rules kicked in, all signs suggest that the Canadian housing market was already cooling—the new rules will simply pull hard on a closing door,” said Douglas Porter, deputy chief economist at BMO Capital Markets.

The new rules “will chill a market that had already seen 16 of 26 markets post June sales drops. Vancouver is leading the way down, but four Southern Ontario cities also reported double-digit sales declines.”

Finance Minister Jim Flaherty announced stricter mortgage lending rules in June because of concern of a possible housing bubble, particularly in the condominium sector in Toronto — and rising household debt.

Under the rules that went into effect last week, borrowers will be allowed to use up to 80% of their property’s value as collateral for home-equity loans, down from 85%.

In addition, the maximum amortization period dropped to 25 years from 30 years for government insured mortgages.

Flaherty also said government-backed mortgage insurance will be limited to homes with a purchase price of less than $1 million.

Canada’s housing market lost a little altitude in June, but it’s still flying pretty high

Gregory Klump, CREA’s chief economist, said home buyers didn’t rush to make purchases before the latest restrictions on mortgage regulations came into effect in July.

“That’s a big change compared to what we saw as a response to previously announced changes,” Klump said.

“It will take some time before the compound effect of previous and recent changes to regulations on Canada’s housing market becomes apparent.”

Big regional divergences persist in the housing market, said Porter. Toronto prices are up 6.8% year over year, while Vancouver, whose 13.3% slide was the only double-digit drop in Canada, has become a buyers’ market.

Calgary is the strongest market, with sales up 16.7% in the past year, one of only three markets reporting double-digit sales gains.

There have been several reports saying some real estate markets and some types of housing are over valued, although there’s a range of opinions about how much and how quickly prices will decline.

Economists and consumers have been closely watching for signs that demand has softened to the point where prices will start going down.

But the association, which represents real-estate boards and associations that handle most of the country’s property transactions through the MLS system, said Monday the decline in sales activity and an increase in new listings resulted in a “more balanced” national housing market in June.

“Canada’s housing market lost a little altitude in June, but it’s still flying pretty high,” association president Wayne Moen said in a news release.

“That said, sales activity and average prices bucked the national easing trend in a number of markets, which underscores that all real estate is local,” Moen said.

The number of newly listed homes rose 1.4% in June compared to May, led by the Toronto market. Some 42 local markets, out of 100 markets across the country, registered a monthly increase in new listings of at least 1%, the association said.

RBC senior economist Robert Hogue noted the resale market eased again in June but the number of homes newly listed for sale rose 1.4% last month.

“Market conditions, therefore, eased a little, providing more breathing room for Canadian buyers,” Hogue said in a research note.

“Despite this easing, the demand-supply equation continued to be balanced in the majority of markets in Canada. The previously tight Toronto market became much more balanced, whereas the Vancouver market inched closer to conditions favouring buyers,” Hogue said.

In the first half of 2012, a total of 257,193 homes traded hands over Canadian MLS Systems, up 4.7% from the same period in 2011.

With files from Canadian Press

Effective yesterday, mortgage shoppers with less than 20% equity are subject to thenew mortgage rules announced recently by the government.

These regulations will cut buying power and refinance ability for a minority of Canadians.

If these changes shut you out of the market, and if renting is not appealing, you don’t have a ton of options.

One alternative is to buy with a strong co-borrower. Another is to get an uninsured mortgage. But the downsides of those are higher rates and limited loan-to-values (Uninsured lenders typically don’t allow LTVs above 85%).

For those of you with mortgages already, these regs will end up pinching a few of you who renew or refinance. Here’s our story from today’s Globe and Mail on that: New mortgage rules could make switching or refinancing tougher.

And in related news, BMO released poll results this morning suggesting nearly half of Canadians are “unfamiliar” with these new rules. We’d submit that a majority still don’t understand the potential ramifications on the real estate market.

Only 45% of those surveyed knew that the maximum amortization on insured mortgages is now 25 years.

Some other findings from the BMO poll:

• 14% of prospective home buyers say the government’s changes reduce the chances they will buy a new home in the next five years.
• 41% of those still planning to buy in the next five years say these changes increase the odds that they’ll spend less on a home than they otherwise would have.
• 45% say this makes it more likely they’ll take out a smaller mortgage.

Borrowers also have OSFI’s new underwriting guidelines to deal with. This additional set of mortgage restrictions will take effect in the coming months (by October 31, 2012 at the latest in most cases).

Canada’s federal finance minister is urging his provincial counterparts to heed the lessons of Europe and keep tightening their budgets as he seeks to keep Canada’s debt-to-GDP ratio the lowest in the Group of Seven rich nations.

In remarks summarizing a conference call he held with the provincial ministers on Wednesday, Finance Minister Jim Flaherty warned on Thursday that the domestic economy could be hurt by the European debt crisis and the stalled U.S. economy.

We see the lesson in Europe if public finances are not sustainable and budgets are not balanced

“I recognized my counterparts for their work in controlling expenditures and reducing their deficits, while reinforcing the need for all governments in Canada to maintain that focus,” Flaherty said in the emailed remarks.

“We see the lesson in Europe if public finances are not sustainable and budgets are not balanced,” he said.

Canada’s federal budget deficit amounts to about 1.5% of gross domestic product and is on track to be eliminated by 2016. But the economically and politically powerful central provinces of Ontario and Quebec are grappling with more serious shortfalls.

We all try to keep on top of things when it comes to our finances, but sometimes sudden changes can throw us for a loop.

Changes to rules for insured mortgages that were announced late last week fall into that category. They could have a big impact on your mortgage payments and the total amount you can borrow.

If you’re considering buying a new home or refinancing/renewing your current mortgage, it would be a wise move to act before Monday, July 9!

The federal government announced last week four new clampdowns on insured mortgages that will quickly come into effect on July 9, 2012.

These changes include:

* Reducing the maximum amortization period to 25 years from 30 years

* Reducing the maximum amount of equity homeowners can take out of their

   homes when refinancing to 80% from the current 85%

* Limiting the availability of government-backed mortgages to homes with

   a purchase price of less than $1 million

* Fixing the maximum gross debt service ratio at 39% and the maximum

   total debt service ratio at 44%

The first two changes will have the biggest impact on Canadian borrowers.

As a mortgage broker, I can help you to quickly assess the situation and offer advice on finding mortgage solutions before the changes take effect.

If you’d like to review your options or if you have any questions, please give me a call or send me an email, and I’ll be happy to discuss how these changes may affect your mortgage situation. It’s my job to ensure you have the best options and strategies available at all times!!

Steven Brouwer – steve@entrustmortgage.ca or 604.795.5347

OTTAWA – Finance Minister Jim Flaherty is tightening mortgage rules to make it harder for people to buy or borrow on their homes.

Flaherty says changes to CMHC rules will cut the maximum amortization period for mortgages to 25 years from the current 30 years.

The changes will also limit refinancing loans to 80 per cent of the value of a home, from the current 85 per cent.

The latest moves are part of a string of initiatives undertaken recently by the federal government to slow the accumulation of debt by Canadian households, which reached a record 152 per cent of income in the fourth quarter of last year.

This will mark the fourth time Ottawa has tightened mortgage rules since 2008.

Central bank governor Mark Carney has been warning for several years that some Canadians are getting in over their heads with debt, and that they could face problems once interest rates — which sit at historic lows — start rising or if there is a second economic crisis.

OTTAWA—Bank of Canada Governor Mark Carney is playing down the need to boost borrowing costs at home as the world waits to see if European leaders can halt the mounting financial chaos on the continent.

In a significant shift, the central bank kept its trend-setting interest rate steady at 1 per cent Tuesday but eased away from warnings that higher interest rates were likely in the near future.

It was largely a reaction to an economic crisis in Europe that is sparking fears of a spreading financial meltdown that, if unchecked, could spiral into a repeat of the 2008-09 global recession.

Prime Minister Stephen Harper warned Europeans to act urgently.

“I don’t want to sound too alarmist, but we are kind of running out of runway here,” he told CBC-TV. “And in terms of structure of the eurozone and in terms of addressing these problems, we do need to see a broader game plan.

“We just can’t say, ‘Let’s wait until the Greek election,’ “ Harper said in a reference to the June 17 election in Greece that could spell out the fate of the eurozone. “We cannot have a Greek election determining the future of the global economy, that’s not fair to anybody.”

Like central bankers around the globe, Carney is keeping his options wide open as the European Union struggles to deal with the current debt troubles threatening Spain, Italy, Portugal and Greece.

A continent-wide banking crisis would damage global economic conditions, and finance ministers from Canada and other G7 developed nations held an emergency conference call Tuesday in which they discussed the need for timely, concerted action by EU members.

No plans for collective G7 help for Europe emerged from the meeting, but Japanese Finance Minister Jun Azumi said major European countries promised to address the crisis responsibly.

Carney, who signalled in April he was keen to begin driving up borrowing costs to head off inflation, is now saying such a move hinges on further improvements in business conditions.

A hike in the bank’s trend-setting rate will depend on “the extent that the economic expansion continues,” Carney said in a statement accompanying Tuesday’s rate decision. In the subtle language of central bankers, it was a telling change in tone that means Canadians are unlikely to see a rise in borrowing costs for some months. Many economists believe that, under the current economic circumstances, the bank will hold steady at 1 per cent until next year.

“The outlook for global economic growth has weakened in recent weeks,” Carney said. “Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions.”

He also noted that, while the U.S. economy continues to expand at a modest pace, economic activity is slowing in emerging market economies such as China, Brazil and India.

Assessing the Bank of Canada’s current outlook, BMO Capital Markets economist Doug Porter said, “Essentially, the ground has shifted out from under their feet in the last seven weeks since their last (rate-setting) meeting when they sent a rather clear warning that higher interest rates were coming.”

Carney said underlying momentum in the Canadian economy appears consistent with the bank’s prediction of 2.4 per cent growth in 2012 despite slightly slower-than-expected expansion in the first three months of this year, when growth on an annualized basis came in at only 1.9 per cent.

The next rate-setting is scheduled for July 17.

Highlights of CAAMP report:

– 23% of mortgage borrowers voluntarily increased their regular payments
– 19% made lump sum payments
– 10% made both lump sum payments and increased their regular payments
– 50% of borrowers pay at least $100 per month above their required payments
– 74% of borrowers who renewed in the last year saw their rate decrease by an average of one-half percentage point
– 83% of Canadians have at least 25% equity in their home

Canadians have been taking advantage of record-low interest rates to lock in their mortgages, a new survey suggests.

The Canadian Association of Accredited Mortgage Professionals, in its annual spring release, says among the 3.8 million Canadians with a fixed rate mortgage, 14% chose to lock in during the past year.

“This data supports comments by lenders that they have high numbers of new borrowers who start with variable rate mortgages but soon opt for the security of fixed rates,” says CAAMP in the report. Overall, 29% of those with mortgages have a variable rate leaving them with exposure to any changes in the Bank of Canada’s lending rate which the prime rate — used in those loans — tends to track.

The survey also found Canadians are making significant efforts to reduce their debt with 23% of respondents saying they voluntarily increased their regular payments, 19% making lump sum payments and 10% doing both.

For those who increased their regular payments, the average amount of the increase was $400-$450 per month. With about 5.85 million mortgage holders in Canada and roughly 1.35 million increasing their payments, it translates into about $7-billion per year. Lump sum payments averaged $12,500, and with about 1.1 million people making these payments, that equals about $13.75-billion.

“Despite daily warnings in the media about mortgage indebtedness — or maybe because of them — Canadians are making responsible decisions about their mortgages and they’re exhibiting confidence in their own situations,” said Jim Murphy, chief executive of CAAMP. “We should feel encouraged by this behaviour — it means Canadians are well positioned to weather a potential rise in interest rates.”

Overall Canadians have $994-billion in mortgages on their primary residences and $161-billion in controversial home equity lines of credit or HELOCs which allow them access to the equity in their home.

The total equity takeout from residences was $46-billion in the past year with renovations accounting for $17.25-billion of the money used. Another $10-billion was used for investments and $9.25-billion for debt consolidation.

Amortization periods, which have been legally shortened by Ottawa for insured government backed loans, are shortening. Lengths are down 20% but Ottawa legally reduced the length a mortgage could be amortized from 40 to 30 years over the past three years.

Craig Alexander, chief economist with Toronto-Dominion Bank, said the locking of mortgage rates has protected consumers from future rise in rates. “It’s a very positive thing that people are shifting to fixed rate because it provides greater security in protecting from upside risk in interest rates,” he said.

The survey also found despite the fact three of the major banks are either out of or backing out of the mortgage broker channel, it still is an important segment of the market. Brokers account for 26% of the market overall and captured 31% of activity in 2011.

The report is based on information gathered by Maritz Research Canada in a survey of 2,000 Canadian consumers in April and May 2012.

Posted in: Mortgages 

http://business.financialpost.com/2012/05/30/canadians-locking-in-low-rate-mortgages-reducing-debt/