Canadian Interest Rate Forecast: "Just an Opinion"

Sagging central Canadian economy should lower Bank of Canada interest rate to 3.25% by end of 2007 - A badly sagging central Canadian economy should drive the Bankof Canada's overnight interest rate down 100 basis points to 3.25 percent by the end of next year, according to World Markets latest economic forecast.

The forecast reports that with even a 100 basis point interest rate cut, Canada's GDP will grow by a disappointing 2.5 per cent in 2007. But that growth will be marked by wide regional disparities with continued sizzling growth in the resource-rich provinces like Alberta and struggling performance in the country's industrial heartland. A slowing U.S. economy and a 90-cent Canadian dollar has resulted in the Canadian manufacturing sector shedding more than 10 per cent of its workforce since 2002, with most of the job losses in Ontario. With exports to the U.S. accounting for 33 per cent of Canada's GDP, Ontario is looking at the potential loss of another 50,000 manufacturing jobs.

"Surging energy and resource prices have pushed the Canadian dollar well beyond the tolerance of much of the Canadian economy,". "While this has significantly benefited Alberta and other western provinces it has hurt central Canada. With inflation not a real concern, we expect the Bank of Canada to make as many as four .25 point rate cuts over the next 12 months to try to restrain the loonie and revive a deteriorating central Canadian economy.

"The World Markets report forecasts the U.S. Federal Reserve Board will only make three .25 cuts in the same period. As Canadian rates continue to fall relative to the U.S., negative interest rate differentials will balloon to 1.25 in the overnight market by the end of 2007. In response to the multiple Bank of Canada cuts, experts expect that holders of long Canada bonds can look forward to as much as a 10-point rally in the price of their bonds, as benchmark long bond yields decline by as much as .50 from current levels. The report also predicts that the TSX will set a new record high north of 13,000 within the next 12 months. Nearly 40% of the TSX is in interest-sensitive financials, telecoms and utilities, and another third of market capitalization is in energy and base metals. "While the TSX will have to ride out near-term weakness in the North American economy, Bank of Canada rate cuts will help high-dividend paying financial stocks, while rising crude and uranium prices will support valuations in much of the energy sector,". "As theNorth American economy pulls out of a mid-cycle slowdown, we expect to see the composite index hit a new high."

Economic Monetary Policy - Bank of Canada Oct '06

Bank of Canada releases Monetary Policy on Economy

OTTAWA — The Bank of Canada today released the October Monetary Policy Report, which discusses current economic and financial trends in the context of Canada's inflation-control strategy.

The Canadian economy is judged to be operating just above its production capacity. While global economic growth is expected to be a little higher than previously anticipated, a weaker near-term outlook for the U.S. economy has curbed the near-term prospects for Canadian exports and growth. The Bank's outlook for growth in the Canadian economy has been revised down slightly from that outlined in July's Monetary Policy Report Update. The Bank's base-case projection now calls for average annual GDP growth of 2.8 per cent in 2006, 2.5 per cent in 2007, and a return to 2.8 per cent in 2008. Weakness in labour productivity growth has led the Bank to lower its assumption for potential growth to 2.8 per cent for the 2006-08 period. Together, these factors imply that the small amount of excess demand now in the economy will be eliminated by mid-2007.

Core inflation is expected to move a bit above 2 per cent in the coming months but return to the 2 per cent target by the middle of 2007 and remain there through 2008. Lower energy prices have led to a downward revision to the near-term projection for total CPI inflation. Total inflation (which includes the temporary impact of the GST reduction) will likely average about 1 1/2 per cent through the second quarter of 2007, before returning to the 2 per cent target and remaining there through to the end of 2008.

As the Bank noted at the time of its 6 September interest rate announcement, the risks around the base-case projection are judged to be a little greater than at the time of the July Update. The main upside risk relates to the momentum in household spending and housing prices, while the main downside risk is that the U.S. economy could slow more sharply than expected, leading to lower Canadian exports. The Bank judges that the risks to its inflation projection are roughly balanced.

On 17 October, the Bank left its key policy rate unchanged at 4.25 per cent. The current level is judged, at this time, to be consistent with achieving the inflation target over the medium term.

Economic Forecast for August '06: "Just an Opinion"

Canada's lower inflation rate, nearly 2% lower, than the United States' economy is generating will allow the Bank of Canada to steer a lower course on interest rates. Much of the credit to the lower inflation rate can be attributed to the stronger loonie.

Prediction is that the Fed in the US has slightly overshot rate hikes and will reverse course in 2007, lowering the rate to 4.75% from its current level of 5.25%.

With core inflation much lower in Canada, the Bank of Canada may have to lower rates further here due to the strong Canadian Dollar weighing heavily on non-resource exporters. The prediction is for Prime to fall from its current level of 6.00% to 5.25% by June 2007.

The bond market is predicted to perform well over the next 12 to 15 months with the 10 year benchmark Gov't bond yield moving from its current level of 4.32%, down to 3.95% in June 2007 and 4.00% in Dec 2007.

So basically low and even lower interest rates for fixed rate mortgages as well as variable rate mortgages being predicted for the remainder of 2006 and all of 2007 will continue to support a strong real estate and housing market in Canada.

Reverse Mortgage: Are They For You?

Reverse Mortgages in CANADA

The Reverse Mortgage (CHIP) has become reasonably popular in recent years.
A reverse mortgage (Canadian Home Income Plan: CHIP) allows home owners to convert equity in their homes into cash, without selling the property or having to make monthly payments.To qualify, home owners must be at least 62 years old, have significant equity in their property and live in Ontario. The amount that can be borrowed depends on the homeowner's age. Reverse mortgages are for between 10% and 40% of the appraised value of the home. The older the home owners, the more they can borrow. The homeowner retains ownership and possession of the house. The lending company registers a reverse mortgage against the property. At death, or when the house is sold, the loan and the accrued interest must be repaid. The biggest disadvantage to reverse mortgages, is that the interest keeps building on the amount of money borrowed (hence the maximum 40% loan). This means that if you borrow $50,000 this year and your interest bill is $5,000, next year your interest will be charged on $55,000 and so on. The longer the loan is in place, the greater the interest bill that has to be paid. It is possible that when the house is sold, 100% of the proceeds from the sale may be required to pay off a loan. If the homeowner dies the estate will have to pay off the loan and the accrued interest. This may wipe out any inheritance for the homeowner's heirs. An alternative is to establish an equity credit line. This allows you to take funds only as you need them, thereby owing the least interest possible, with no surprises.

A CHIP Home Income Plan is a loan secured by the equity in your home.

A CHIP Home Income Plan is designed exclusively for homeowners age 60 and older. This age qualification applies to both you and your spouse.

You can receive from $20,000 to $500,000 from your home equity. The specific amount is 10% to 40% of the current appraised value of your home, based on your age and that of your spouse, and the location and type of home you have.

You receive the money tax-free. It is not added to your taxable income so it doesn't affect Old Age Security (OAS) or Guaranteed Income Supplement (GIS) government benefits you may receive.

You can use the money any way you wish. Maybe you want to build up your savings and have extra income to cover your expenses. Perhaps you want to update your home or help your family without depleting your current savings. Or you have debts and monthly payments you'd like to get rid of. The only condition is that any outstanding loans secured by your home must be retired with the proceeds from your CHIP Home Income Plan.

No payments are required while you or your spouse live in your home. The full amount only becomes due when your home is sold, or if you move out.

You maintain ownership and control of your home. You will never be asked to move or sell to repay your CHIP Home Income Plan. All that's required is that you maintain your property and stay up-to-date with property taxes, fire insurance and condominium or maintenance fees while you live there.

You keep all the equity remaining in your home. In our many years of experience, 99 out of a 100 homeowners have money left over when their CHIP Home Income Plan is repaid. And on average, the amount left over is 50% of the value of the home when it is sold.

Your estate is well protected. CHIP guarantees that the amount to be repaid will never exceed the fair market value of your home at the time it is sold. If your heirs want to keep your home, they can repay the CHIP Home Income Plan from other funds.

You can save on taxes. If you decide to use the money you receive to buy non-registered investments such as GICs and mutual funds, you may be able to deduct the CHIP Home Income Plan interest charges from the income those investments earn. Be sure to consult a financial or tax advisor.
You can choose your interest rate term. Your interest rate will be based on the length of term you choose.
You receive an automatic annual interest rate discount. An interest rate discount is given based on the length of time you have your CHIP Home Income Plan. Regardless of the term selected, after three years, the rate at that time will be discounted by 0.25%, and will be discounted an additional 0.25% each year thereafter to a maximum of 1.50%.

You have a number of payment options.
No payments are required for as long as you or your spouse live in your home.
If you wish, you can pay all or part of the accrued interest once every calendar year. The payment must be a minimum of $1,000 and can be made at any time during the year.
The full amount only becomes due when you and your spouse pass away, when the home is sold, or if you both move out.

You have the option to repay in full at any time. When you repay, an interest rate differential may apply (limited to 3 months' interest). If you repay within the first three years, a prepayment amount will apply. These may be waived or reduced in the event of death or a move to a long-term care facility or retirement residence.

There are some set-up costs. The independent home appraisal typically costs $175 - $250 in major cities, but may be somewhat higher in rural areas or in cases of unique properties. Fees for independent legal advice are typically $300 - $600. Closing costs of $1,285 will be added to your CHIP Home Income Plan, which means you don't have to pay it directly.

NEW!! Interest only Mortgages

Interest Only Homeownership Product

CMHC's interest only homeowner mortgage insurance product is designed to allow lenders to provide borrowers who have a strong history of responsibly managing their credit, with flexibility in repaying their mortgage loan. Similar to CMHC's existing Line of Credit product that has been in the marketplace since 2003, qualified borrowers will be able to pay interest only for the first 10 years of their mortgage. Following the interest only period, principal and interest payments will begin and will be sufficient to ensure the balance is paid in full within 25 years of the date the mortgage was originally initiated.

This feature provides borrowers with cash flow flexibility during the early years of a mortgage in a prudent and responsible manner. Interest only mortgages will be available only for borrowers with a strong track record in managing their debt and who can afford to repay the mortgage principal following the initial interest only period. CMHC will qualify borrowers based on the full principal and interest payment required to repay the loan in full over 25 years.

CMHC Increases Mortgage Amortization

Extended Homeowner Amortization Periods

Anticipating the needs of Canadians, earlier this year CMHC introduced to the marketplace extended amortization periods of up to 30 years for purchase transactions through a pilot product. The pilot was a great success and has helped improve access for a significant number of Canadians by lowering monthly payments. Accordingly, CMHC is pleased to announce that its 30 year flexible amortization offer is now an ongoing product offering.

Building on the success of the pilot, CMHC is also pleased to introduce extended amortization periods of up to 35 years. Extended amortization flexibilities are available on homeowner purchase and refinance transactions (excluding Line of Credit) and can be combined with our Flex Down product.