Bank of Canada maintains overnight rate target at 1 per cent

Ottawa -May 31, 2011
The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic recovery is proceeding broadly as expected in the Bank’s April Monetary Policy Report (MPR). The U.S. economy continues to grow at a modest pace, limited by the consolidation of household balance sheets. Growth in Europe is maintaining momentum, although the risks related to peripheral economies have increased. The disasters that struck Japan in March are severely affecting its economic activity and causing temporary supply chain disruptions in advanced economies. Commodity prices have declined recently but are expected to remain at elevated levels, supported by tight global supply and very strong demand from emerging markets. These high prices, combined with persistent excess demand conditions in major emerging-market economies, are contributing to broader global inflationary pressures.  Despite the challenges that weigh on the global outlook, financial conditions remain very stimulative.

In Canada, the economic expansion is proceeding largely as expected in the April MPR. The economy grew at an annual rate of 3.9 per cent in the first quarter, reflecting continued strong business investment, smaller contributions from household and government spending, and a modest drag from net exports. Although temporary supply chain disruptions are expected to restrain growth sharply in the current quarter, this is expected to be unwound in subsequent quarters.

While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation. On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered.

Information note:

The next scheduled date for announcing the overnight rate target is 19 July 2011.
A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 20 July 2011.

Bank of Canada maintains overnight rate target at 1 per cent

OTTAWA –The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
As anticipated in the January Monetary Policy Report (MPR), the global economic recovery is becoming more firmly entrenched and is expected to continue at a steady pace.  In the United States, growth is solidifying, although consolidation of household and ultimately government balance sheets will limit the pace of the expansion.  European growth has strengthened, despite ongoing sovereign debt and banking challenges in the periphery.  The disasters that struck Japan in March will severely affect its economic activity in the first half of this year and create short-term disruptions to supply chains in advanced economies.  Robust demand from emerging-market economies is driving the underlying strength in commodity prices, which is being further reinforced by supply shocks arising from recent geopolitical events. These price increases, combined with persistent excess demand conditions in major emerging-market economies, are contributing to the emergence of broader global inflationary pressures.  Despite the significant challenges that weigh on the global outlook, global financial conditions remain very stimulative and investors have become noticeably less risk averse.

Although recent economic activity in Canada has been stronger than the Bank had anticipated, the profile is largely consistent with the underlying dynamics outlined in the January MPR.  Aggregate demand is rebalancing toward business investment and net exports, and away from government and household expenditures. As in January, the Bank expects business investment to continue to rise rapidly and the growth of consumer spending to evolve broadly in line with that of personal disposable income, although higher terms of trade and wealth are likely to support a slightly stronger profile for household expenditures than previously projected.  In contrast, the improvement in net exports is expected to be further restrained by ongoing competitiveness challenges, which have been reinforced by the recent strength of the Canadian dollar.

Overall, the Bank projects that the economy will expand by 2.9 per cent in 2011 and 2.6 per cent in 2012. Growth in 2013 is expected to equal that of potential output, at 2.1 per cent. The Bank expects that the economy will return to capacity in the middle of 2012, two quarters earlier than had been projected in the January MPR.

While underlying inflation is subdued, a number of temporary factors will boost total CPI inflation to around 3 per cent in the second quarter of 2011 before total CPI inflation converges to the 2 per cent target by the middle of 2012. This short-term volatility reflects the impact of recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect taxes. Core inflation has fallen further in recent months, in part due to temporary factors. It is expected to rise gradually to 2 per cent by the middle of 2012 as excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of material excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.

Information note:
A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 13 April 2011. The next scheduled date for announcing the overnight rate target is 31 May 2011.

How to get a better Interest Rate on your mortgage

Have you ever wondered why banks have posted mortgage rates, yet they’re willing to offer mortgages below these interest rates to some borrowers?

The Bank of Canada (BoC) wanted to find out how consumers can get the very best mortgage rate, which led to the undertaking of an extensive study on mortgage discounting.

According to their research, Canadians who get the best mortgage rates are those who:

1. Bargain

• Research proves that bank profits “are significantly higher in haggle environments.” As a result, banks prefer not to put all of their cards on the table.
• This leads to “price discrimination”, whereby banks give better deals to skilled negotiators and well-informed borrowers.

2. Have larger mortgages

• “Since few negotiate the renewal of their mortgage… (this) provides lenders with an incentive to attract consumers with larger loans who have large outstanding balances at the time of renewal.”

3. Use a mortgage broker

• The report states that brokers lower the “search costs” of getting multiple quotes. Multiple quotes (lower search costs) are strongly correlated with lower rates. 
• “Over the full sample, the average impact of a mortgage broker is to reduce rates by 17.5 basis points.”  That’s ~$1,670 of interest savings on a typical $200,000 mortgage over five years.
• Bank “mortgage specialists offer convenience to consumers, although they do not reduce search costs. This is because they work for one lender only.” 

Click here to read the working paper on the BoC study.

It’s important to understand that mortgage brokers can offer lower rates because of the large volume of mortgages we successfully fund with lenders each year. This enables mortgage brokers to offer our clients wholesale versus retail pricing.

And while mortgage brokers have access to hundreds of products available through dozens of lenders, when you approach a lender directly for a mortgage, that lender can only offer one line of mortgage products – their own.

As always, if you have questions about finding the right mortgage product and rate to suit your specific needs, I’m here to help!

Properly converting an owner-occupied home into a rental property

By Leslie Penney Published in Leslie's Blog (Propertywire)

While reading a vast amount of information on finance, mortgage, the economy, taxation, etc, I have recently come across a great blog post by Million Dollar Journey on the tax implications of converting a principal residence into a rental property (http://www.milliondollarjourney.com/ - if you haven’t already, you should really check this guy out).

It’s actually a guest article by Kerry who is an accountant and currently articling with Meyers Norris Penny LLP in British Columbia.

As we all know, real estate is an investment whether for financial gains or for personal and family reasons, it’s still an investment. For some, the goal is to accumulate more than one property to earn an income from rental and to build a nest egg for retirement.

For those looking to purchase more than one property there are certain tax implications you need to be aware of.

The example given by Kerry is a client who has purchased a home in the past and has been able to pay off the mortgage well in advance, and the house value has sky-rocketed since. With this being said, the client is interesting in obtaining a newer, bigger house. However, the home has great sentimental value and the client wishes to hold on to it and rent it out.

Since the client has loads of equity in the old house, they head off to their mortgage broker to take out a mortgage on it to purchase the newer home. The client believes that the mortgage interest is now tax deductible because it’s on the rental property – a common thought for most.

When tax time rolls around, the clients accountant uncovers the big mistake that many make. The client is left with taxable rental income but non-deductible mortgage interest – a double whammy for the client.

Many question why the mortgage interest is non-deductible, but through the jigs and reels of it all, the proceeds from the refinance wasn’t used on the rental property, rather it is used to purchase the new, owner-occupied home.

Kerry provided the following information in the post. To simplify the subject, interest paid is generally deductible for tax purposes under the following two conditions:

1)    The interest was paid or payable in the year in accordance with a legal obligation, and
2)    The borrowed funds were used for the purpose of earning income from a business or property – the term “property” referring to interest income, dividends, rents and royalties but not capital gains.

The first point is rarely a problem because mortgages are set-up that way, but point number two is usually where the problem lies.

The CRA has a bulletin (IT-533 Interest Deductibility and Related Issues) which explains the interpretations of the deductibility of interest expense under various provisions of the Income Tax Act and provides several court examples to demonstrate a number of examples.

Basically, the main point the bulletin is getting at is that the “test to be applied is the direct use of the borrowed money”. However, there may be some exceptions to the indirect use.

The tax payer is responsible for determining what the funds were used for and reporting it correctly when completing your annual income taxes.

In the example given above, it’s clear that the client’s funds were to purchase a new owner-occupied, not to earn investment income. And as we all know, this interest isn’t tax deductible.  Even though the rental property is the security, the use of the funds was not to earn an investment income.

How should an investor approach a situation such as this? Let’s take a look at client number two, we’ll call him Jack. He was in the same boat – current home mortgage free and lots of equity. But this is how he approached it:

1)    On day one, Jack sold his current home (the “old home”) to his parents for fair market value. Jack’s parents paid for the purchase by issuing a promissory note to him. Always concerned about property transfer tax and other matters, Jack discussed this series of transactions with his lawyer who ensures all steps are properly documented;
2)    On day two, Jack reacquired the “old home” from his parents by borrowing from the bank on the security of a mortgage. Jack plans to use the “old home” as a rental property;
3)    Jack’s parents use the funds received to repay the promissory note they issued to him on day one, and
4)    Jack then uses the funds received from his parents to purchase the new home.

Using the tracing principle applied by the CRA, it’s clear that the money borrowed from the lender was to purchase a rental property and therefore his interest is tax deductible.

The key takeaway point here is that when client are looking to purchase rental properties and they have a great deal of equity build up or reserve funds, it’s wise to speak with a professional before they make any move. The flow and use of the money is key when looking for tax deductibility and interest write-offs.

Again, many thanks to Million dollar Journey and Kerry for the insightful article.

*I am in no way, shape, or form a tax accountant. The intention of the article above is to bring to your attention the fact that there are tax implications related to purchasing, renting, and selling income-generating properties. Before you make any decisions it is strongly suggested that you talk to your tax accountant to ensure you have the appropriate plan in place.

More Canadians are Turning to Mortgage Brokers

When it comes to mortgage financing, more and more Canadians are choosing to work with a professional mortgage broker. According to a recent study by the Canada Mortgage and Housing Corporation (CMHC), 23 per cent of mortgages written were arranged through a broker.



Canadians are just catching up with their American neighbors, who are far less likely to simply walk into their home bank for a mortgage. In 2000, almost 70 per cent of all U.S. mortgages were arranged through mortgage brokers.

If we follow the U.S. model – and it seems that we are — then we’re in for a sea of change in the way Canadians manage their most significant personal asset. It makes sense. After all, investment returns aren’t as lucrative as they were five years ago, and investors are seeking out ways to make financial gains through avenues they may have overlooked.


There are some significant benefits to working with an independent mortgage broker. Firstly, let’s compare mortgage expertise: Most banks have one or more representatives who are specifically assigned to assist with mortgages. Their role is to develop mortgage business for the banks. A ontario mortgage broker, on the other hand, is a trained mortgage professional who has met standards for education. The comprehensive training of an independent mortgage broker may exceed the training of their counterparts at the bank. More importantly, the mortgage broker is independent. He or she is not an employee of a lending institution, but has access to rate and option information for a full spectrum of chartered banks and other lending institutions. Their role is to find the best possible mortgage rates and options for you.


Let’s also look at choice: A mortgage broker offers you access to many competitive lenders, each with a range of mortgage options. It would take weeks of research, telephoning and personal visits to recreate the range of features and options that a mortgage broker has at his or her fingertips. Rate information, mortgage options and payment schedules are up-to-the-moment, so you and your broker can make valid comparisons of the options available. The result of all this choice is a mortgage which is customized to meet your needs and to save you money.


Also consider accessibility. Your mortgage broker will be available to you before and after your mortgage closes, which will be good news for those who have spent long hours on hold or in a telephone voice answering loop.


Above all, clients have turned to mortgage brokers for better rates. Access to a broad range of lending institutions is a critical advantage for mortgage shoppers. A quarter-point difference on your mortgage rate can add up to thousands of dollars over the life of your mortgage. Many mortgage brokers work inside a brokerage organization with sufficient mortgage volumes that they can negotiate the best possible rates for your situation. Canadian homeowners who have experienced the benefits of a mortgage broker are unlikely to ever return to a world in which they simply accept the best posted rate at their local bank.

We are commited to providing quality information to help people make informed decisions about their mortgage financing needs.

See the latest Ontario Mortgage Rates.

[Source - Dominion Lending Centres] 

Bank of Canada maintains overnight rate target at 1 per cent

FOR IMMEDIATE RELEASE 18 January 2011

CONTACT: Jeremy Harrison 613 782-8782

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Bank of Canada maintains overnight rate target at 1 per cent

OTTAWA –The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic recovery is proceeding at a somewhat faster pace than the Bank had anticipated, although risks remain elevated. Private domestic demand in the United States has picked up and will be reinforced by recently announced monetary and fiscal stimulus. European growth has also been slightly stronger than anticipated. Ongoing challenges associated with sovereign and bank balance sheets will limit the pace of the European recovery and are a significant source of uncertainty to the global outlook. In response to overheating, some emerging markets have begun to implement more restrictive policy measures. Their effectiveness will influence the path of commodity prices, which have increased significantly since the October Monetary Policy Report (MPR), largely reflecting stronger global growth.

The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand. The contribution of government spending is expected to wind down this year, consistent with announced fiscal plans. Stretched household balance sheets are expected to restrain the pace of consumption growth and residential investment. In contrast, business investment will likely continue to rebound strongly, owing to stimulative financial conditions and competitive imperatives. Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities. However, the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high.

Overall, the Bank projects the economy will expand by 2.4 per cent in 2011 and 2.8 per cent in 2012 – a slightly firmer profile than had been anticipated in the October MPR. With a little more excess supply in the near term, the Bank continues to expect that the economy will return to full capacity by the end of 2012.
Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the Canadian economy. Core inflation is projected to edge gradually up to 2 per cent by the end of 2012, as excess supply in the economy is slowly absorbed. Inflation expectations remain well-anchored.  Total CPI inflation is being boosted temporarily by the effects of provincial indirect taxes, but is expected to converge to the 2 per cent target by the end of 2012.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered. 


Information note:
A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 19 January 2011. The next scheduled date for announcing the overnight rate target is 1 March 2011.

Flaherty unveils new rules aimed at curbing soaring household debt

OTTAWA - Finance Minister Jim Flaherty has announced new mortgage regulations aimed at reducing Canadians' soaring household debt.

Flaherty has unveiled three new rules:

1) Mortgage amortization periods will be reduced to 30 years from 35 years.

2) The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from 90 per cent.

3) The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

The rules are aimed at encouraging responsible lending and borrowing and encouraging people to increase their home equity.

"Our measures will help improve the financial situation of households in Canada," Flaherty said.
"While interest rates are currently low by historical standards, eventually they will rise. Canadians should — and for the most part do — understand this when taking on significant debt such as the purchase of a new home."
The minister said the measures are aimed at protecting "the stability of the economy by ensuring lenders' practices are sustainable." He said that will increase the security and stability of home ownership.

"This will also increase the savings of Canadian families — savings of tens of thousands of dollars over the life of a mortgage, savings that go back in the pockets of hardworking families, where they belong."
The new rules come on the heels of a Bank of Canada announcement that Canadians' domestic debt burdens have hit record levels. The ratio of household debt to disposable income has reached 147 per cent and household debt has reached $1.4 trillion. The International Monetary Fund has called household debt the No. 1 risk to the Canadian economy.

[Source - The Canadian Press]

If you have any questions on how these rules may affect you, please feel free to call or email me.

I think these rules are good and although they may prevent some from buying a home now, they will force these people to save more money to facilitate a purchase in the future which will make them better off in the long run.

What are your thoughts on the new rules?