July 23, 2016

CIBC sells negative-yield bonds for 1st time

Bank sells 1.25 billion euros worth of debt guaranteed to lose money in long run

By Pete Evans, CBC News

CIBC, led by CEO Victor Dodig, sold its first ever negative yielding covered bonds this week.

CIBC, led by CEO Victor Dodig, sold its first ever negative yielding covered bonds this week. (Jeff McIntosh/Canadian Press)

Canadian Imperial Bank of Commerce has become the first Canadian bank to sell bonds with a negative yield, and it had no problem selling the debt even though buyers are guaranteed to lose money if the debt is held to maturity.

The bank raised almost $1.8 billion via a bond sale of six-year debt that yields minus 0.009 per cent. That means anyone who bought the debt paid $100.054 for the right to get $100 back from the bank in 2022.

Despite the seemingly poor return, the bank had no trouble selling the euro-denominated bonds on Monday. The bond sale was two times oversubscribed, which means there were people willing to buy twice as much debt as there was debt available for sale.

Going negative

The bond sale makes CIBC the first Canadian bank to dip into a current appetite for negative-yielding bonds. But the lender is far from the only one to be selling investments guaranteed to lose money.

According to Bloomberg data, there is almost $12 trillion US worth of negative-yielding debt in the world now, much of which has come from governments and central banks that have cut their interest rates to record lows in order to stimulate the economy.

“Low yields may be great for governments, but they are lousy for savers and investors,” Hilltop Securities managing director Mark Grant said in a note

Investors have an appetite for such debt because the forecast for other assets is even worse. With stock returns looking dodgy due to fears about the global economy, lending money to a bank can seem appealing even if it’s guaranteed to lose a few pennies per dollar over time.

“As expected returns on ‘safe’ assets have diminished, investors have been forced up the ‘risk curve’ to obtain satisfactory returns,” Scotiabank said in a recent note to clients. “The search for yield will only become more desperate.”

The CIBC bonds are doubly appealing, because they are what’s known as covered bonds. That means they are backed by Canadian mortgages, so investors in the bonds have the right, theoretically, make a claim against those mortgages in the unlikely event the bank ever defaults on its loans. That gives investors two layers of protection, both in the bank’s creditworthiness, and from that of the underlying assets — the mortgages themselves.

The bonds have yet to be rated by an agency, but they are expected to get a pristine AAA rating for safety and creditworthiness, according to Bloomberg.

Before you sign that mortgage renewal offer, think carefully about your options

Garry Marr | May 1, 2016 

Twenty per cent of customers coming up for renewal each year will switch lenders to seek a deal — Here’s what to look for and what to avoid.

There’s a one-in-four chance that, if you’re among the 5.7 million Canadian households with a mortgage, you’re going to receive a letter in the mail this year telling you it’s time to renew.

TD Bank Financial Group said the number of renewals each year has climbed to 25 per cent as homeowners have switched to shorter terms, leading to more mortgages coming up for renewal every year.

“Traditionally, homeowners have gravitated to five years, that has been very popular,” said Pat Giles, associate vice-president, real estate secured lending, TD Canada Trust. “In recent years, we have seen the popularity of shorter terms emerge, the two-year terms, four years — meaning sometimes they (merge into the same renewal time) in one year like this.”

A 2014 report from the Mortgage Professionals Canada, which represents the mortgage industry, found 20 per cent of those customers coming up for renewal each year will switch lenders to seek a deal — something consumers are generally loathe to do because of perceived costs.

A better deal can include better terms, like large lump sum prepayment options, or it might mean just a straight out better rate. The difference can be meaningful: Discounted five-year closed fixed rates are as low as 2.3 per cent, but the posted rate at major banks is now closer to 4.8 per cent.

Retiring with a mortgage? Why you might want to think twice about that

Jonathan Chevreau | March 22, 2016 11:12 AM ET

When it comes to opining on seniors carrying debt into retirement, I’ll state upfront my personal bias that anyone with credit-card debt — or even mortgage debt — has no business fantasizing about retirement. To me, it’s simple: if you have debt of any kind, you keep working until it’s all discharged. As I have written elsewhere, I believe the foundation of financial independence is a paid-for home.

CREDIT GETTY IMAGES

The governor of the Bank of Canada recently mooted the possibility of negative interest rates, an exotic concept that sounds a little like anti-matter. Instead of receiving interest on you bank balance, you may eventually have to pay the banks for the privilege of holding your money! This bizarro world is not far off; Switzerland, for example, had negative interest rates on 10-year bonds for most of 2015.

That said, I recognize there’s a large segment of the population not fortunate enough to have a paid-for home, corporate pensions or financial assets like RRSPs and TFSAs. I personally know seniors who still rent and have no financial safety net. Some may have to resort to payday loans just to get by until the next month’s government-issued Canada Pension Plan, Old Age Security or Guaranteed Income Supplement cheques arrive.

Doug Hoyes, president of Kitchener-based bankruptcy trustees Hoyes Michalos & Associates Inc., profiles senior debtors every two years in his Joe Debtor study. The data are shocking. He defines seniors as 60 or older, so many are baby boomers either in retirement or on the cusp of it. (The oldest boomers, born in 1946, are now 70, while the youngest boomers, born in 1964, are 52 and presumably still working full-time.)

Senior debtors make up 10 per cent of Hoyes’ 2015 study, up from eight per cent four years ago and owe an average of $69,031 in unsecured debt, higher than any other age group. Nine per cent borrow against their income — often pension income — by resorting to payday loans.

Payday loans are, in my opinion, a form of usury — defined as debt instruments charging more than 60 per cent in interest a year. However, because the loans are only a few weeks in length (literally, until the next payday), the lenders can charge $20 for every $100 borrowed in Ontario, which if paid over a year would be interest of 546 per cent, Hoyes says.

Fifty three per cent of these senior debtors live alone and often cite illness or injury as a cause of their financial troubles. Among bankrupt seniors, nine per cent had payday loans. In some cases, their adult children are making financial demands and they’re too embarrassed to admit they have few alternative resources.

At the other extreme are the fortunate, wealthy boomers with paid-for homes, large defined-benefit pensions and maxed-out registered and even non-registered (taxable) investments. For them, says Emeritus Retirement Solutions president Doug Dahmer, the biggest expense will be tax, something that must be planned for well in advance. In this case, borrowing may turn out to be tax efficient.

Then there are the rest of us: perhaps with no large company pensions, modest financial assets and a home with only some equity in it, which may be a tempting source of future funds in retirement or semi-retirement.

This middle group is often torn between paying down the mortgage before retiring, or capitalizing on low interest rates to take a chance on building their financial nest eggs in the stock market.

Last July a CIBC poll found that, on average, Canadians expect to be debt free by age 56, although some are indebted well into their sixties. Even in the 45-plus cohort, more than 68 per cent are in debt, including 31 per cent who still have mortgages. In 2013, CIBC found 59 per cent of retirees were in debt.

But this may not be necessarily a bad thing, argues CIBC Wealth tax guru, Jamie Golombek. “There’s no harm in having debt if it’s for an appreciating asset. If you’re in your home for the long term and borrowing at low interest rates, it’s not a big problem. The problem is when you run out of cash flow to service the debt.”

Interest rates are near 60-year lows: posted five-year mortgage rates are under three per cent at most financial institutions (and under four per cent for 10 years). Of course, unless you lock in, there’s no guarantee rates won’t rise to more uncomfortable levels.

In a paper he wrote for CIBC last year (Mortgages or Margaritas), Golombek suggested the zeal to pay down debt could put some people’s retirements at risk. It was written in response to another CIBC poll that found 72 per cent of Canadians prefer debt repayment over saving for retirement. He found that if you can get 6 per cent annual returns in a balanced portfolio of investments, the net benefit was almost double that of paying down debt.

Back in 2012, BMO Financial Group tackled the same issue, noting that rising home prices meant real estate formed a disproportionate amount of couples’ net worths. This tempts some to tap into their home equity in retirement in order to overcome their past failure to save. As boomers become net sellers of homes instead of driving up prices, BMO said home prices could fall by one per cent per year. Downsizing, renting or moving to a small town are all ways to access some of the equity in your home.

Still, Hoyes has seen enough senior debt to argue against taking on more. “Low interest rates are great as long as you can make payments, but what if you lose your job, get sick or divorce? The fact moderate interest rates are only three per cent is irrelevant if there’s no money coming in. When your income becomes fixed, your expenses have to become fixed, but it’s hard: you can’t control the price of gas or car insurance.”

Personally, I like to have enough Findependence that you reach what Dahmer terms the “Work optional” stage. It’s about being in control of your days, Hoyes says, “If you have debt when you retire you are not in control of your day.”

And of course, medical expenses can creep up. It’s not as bad here as in the United States, where medical costs can have catastrophic consequences, but “In Canada medical expenses are insidious,” Hoyes says, “It’s a lesser amount, but creeps away and boomers are more likely to get whacked.”

One option, if available, is to work part-time in retirement. An analysis by Toronto-based ETF Capital Management found that if a retiree earns just $1,000 a month extra in consulting income or a part-time job, a nest egg’s depletion slows dramatically. For couples, if both partners earn that much, the financial picture is rosier still.

This may or may not be “optional” work. BMO found 29 per cent of Canadians expect to delay retirement and work part-time in retirement because of savings shortfalls. For them, BMO says, tapping home equity constitutes “Plan B,” one that 41 per cent of Canadians are considering.

But avoid reverse mortgages, Dahmer counsels. He says it’s more cost efficient to use a secured line of credit against the house. Draw funds only if needed, but set it up while you’re still working and the bank thinks you’re a good credit risk.

Dahmer thinks flexible use of debt through a line of credit is a sound strategy for smoothing spending in peak years, especially if your main income is from registered assets. “You’re far better off paying 2.5 to 3.5 per cent in interest for a few years than forcing yourself from a 33 per cent to 42 per cent marginal tax bracket, not to mention Old Age Security being clawed back.”

The savings can be in the hundreds of thousands: “Retirement is the one time in life that strategic tax planning can make a significant difference. That’s because of the many different places you can source cash flow from, each with its own distinctive tax implications.”

Illustration by Chloe Cushman/National Post

Financial Post

CMHC May Force Banks To Shoulder More Of The Risk Of Mortgages

 |  By Alexandra Posadzki, The Canadian Press

MORTGAGE HOUSE

TORONTO — Canada Mortgage and Housing Corporation is continuing to explore the possibility of forcing banks to shoulder more of the risk associated with home mortgage loans.

During a speech in Calgary, CMHC president and CEO Evan Siddall said the option of requiring lenders to pay a deductible on mortgage insurance claims is still on a table.

According to speaking notes posted on the website of the federal housing agency, Siddall told his audience that the CMHC is working with a number of government entities, including the Department of Finance and the Bank of Canada, to examine ways of better distributing risk across the financial system.

The idea of having banks pay a deductible on mortgage insurance claims was first floated by CMHC under the previous Conservative government.

It’s been unclear whether the new Liberal government is interested in pursuing the idea.

household debt by age group

This chart from the Canadian Centre for Policy Alternatives shows people in their 20s have the highest debt loads, but people in their 30s and 40s experienced the largest increase in debt since the turn of the century.

Homebuyers with less than a 20 per cent down payment are required to obtain mortgage default insurance from either CMHC or one of the private mortgage insurers.

The Canadian Bankers Association warned the previous government that shifting more mortgage risk onto the banks could threaten the country’s financial stability.

The industry association laid out its position in a letter to CMHC penned in August 2014, which was obtained by The Canadian Press through an Access to Information request last year.

The Department of Finance said last November that it had undertaken preliminary research to examine the impact of shifting more of the risk to the banks.

Siddall made his comments Monday during a luncheon hosted by the C.D. Howe Institute, a think-tank that once called for the privatization of the CMHC.

During his speech, Siddall defended the organization’s status as a public institution, arguing that it played an important role during the 2008 global financial crisis.

“As a Crown corporation with a public policy mandate, CMHC needs to be present in the market through all economic cycles,” he said.

“This is a fundamental way in which we contribute to Canada’s financial stability. In fact, our role now in Alberta is to support continuous access for Albertans to the housing market, even if private insurers choose to pull back.”

Albertans have highest debt load in Canada, Equifax says

Consumer debt in Alberta has jumped 17 per cent.

Consumer debt delinquencies jump 25% in province, 17% in Calgary

By Erika Stark, CBC News 

Albertans have the highest average debt load in the country at more than $27,000, says Equifax Canada.

A study released this morning says consumer debt delinquencies in the province jumped 25 per cent over the same quarter last year.

But the nationwide delinquency rate didn’t change, and Equifax Canada says rates remain at historic lows.

“Despite the ups and downs of today’s economy we’re seeing that Canadians are generally able to manage debt and rein in spending when they have to,” Regina Malina, the senior director of decision insights at Equifax Canada, said in a release.

“It may be a surprise to some, but the fact is delinquency rates in the oil-producing provinces are still relatively low. Most people are still finding a way to pay back what they owe.”

The Prairie provinces and Newfoundland — regions that have been the most impacted by the downturn — saw the biggest increase in delinquency rates. Tumbling oil prices have led to widespread layoffs in the oil and gas sector.

Another credit rating agency, TransUnion, reported last November that Alberta used to fall below the national average delinquency rate. That changed in the second half of 2015.

  • See the provincial delinquency rates here.

CONSUMER DEBT AND DELINQUENCYAverage debt in Calgary is $28,421 excluding mortgages, while Edmonton’s average debt is $26,479 compared to average consumer debt nationwide of $21,458.

The only age category to experience an increase in delinquency rates in the last quarter of 2015 was the under-26 group. The rate for that category rose 2.9 per cent.

“Debt is often used as a tool for consumers to accomplish their objectives. However, as people get older, their income earning capabilities generally trend downward,” Equifax said in a release. “To increase their financial security, Canadians should develop a plan to pay off their debt within a set timeframe.”

Equifax says interest rates will rise eventually and those relying on the availability of cheap credit will be tremendously vulnerable.

Canada’s total reported consumer debt is now at $1.621 trillion, compared to $1.529 trillion a year ago.

The lesson home buyers should take from RBC’s mortgage rate hike

ROB CARRICK

There’s just one reason for the strength of Canada’s housing market – low, stable mortgage rates.

Rates are still low, but the stable part is in question after Royal Bank of Canada announced a small but still significant round of mortgage rate increases that will take effect Friday. Other banks will likely adjust rates as well, after a brief period of letting RBC draw fire as the first to move.

RBC will increase borrowing costs on special offers for fixed-rate mortgages with terms of two to five years by 0.1 of a percentage point. For example, the five-year fixed rate will rise to 3.04 per cent from 2.94 per cent, enough to increase monthly payments on a $400,000 mortgage amortized over 25 years to $1,901 a month from $1,881.

Higher payments aren’t much of an issue – for now. Despite economic weakness that argues for stable or possibly even lower borrowing costs, mortgage rates appear to be facing upward pressure. Nothing startling, mind you. But the days of stable five-year fixed rates tucked nicely under the 3-per-cent threshold may be coming to an end at your neighbourhood bank branch.

Lenders are facing higher costs for financing mortgages as a result of new mortgage market rules introduced last year by federal regulators. As well, unsettled financial market conditions are forcing lenders to pay higher rates on the money they raise to lend out as mortgages. Canadian consumers are used to mortgage rates that closely track the state of the economy. But today’s mortgage market is more complex than that.

Fortunately, competition in the mortgage business is intense. If there’s one lesson home buyers and owners should take from RBC’s rate increase, it’s to never get a mortgage without cross-checking rates with at least one other source, preferably a mortgage broker with access to multiple lenders. A quick survey of mortgage brokerage firms Wednesday found five-year fixed rates as low as 2.44 per cent, which handily beats RBC’s special prerate increase offer of 2.94 per cent.

A tip for people who plan to buy a house in the busy spring period: Lock in a mortgage rate now to eliminate the risk you’ll be caught by any rate increases ahead. On the Ratespy.com website, some lenders are holding their comparatively low current rates through early April or May.

There are lots of alternative mortgage lenders that beat the banks not just on rates, but also with much less onerous penalties if you have to break a mortgage before it matures. Also, you don’t have to negotiate with these lenders. There’s no need to get a line of credit or bring your investments over to get the best rate on a mortgage.

Another message to take from RBC’s rate increase is that variable-rate mortgages are losing some of their appeal. In addition to raising costs on fixed-rate mortgages, RBC announced that the special offer on its five-year variable-rate mortgage will move to prime minus 0.1 of a percentage point from prime minus 0.25.

Fixed-rate mortgages have been the most popular lately, but there has until now been a case for going with the variable-rate option. Variable-rate mortgages are priced off the prime rate, which is influenced by the Bank of Canada’s benchmark overnight rate. The central bank is nowhere close to raising rates, which means variable rate mortgages appeared to be safe from increases in the short term. Now, we see that this isn’t the case. Both fixed and variable rates are still low in today’s mortgage market, but maybe not stable.

Good Advice for First-time Homebuyers

Making an Informed Investment

If you’re in the market for a new home, take a moment to ask yourself a few key questions about what you should be looking for, how much you can comfortably afford to spend, and whether homeownership is right for you.

How much home can you afford?

  • Before you begin shopping for a home, prepare a simple budget, so you can figure out where most of your money is going on a monthly basis. If you aren’t sure how much you’re spending each month, use CMHC’s Household Budget Calculator to take a realistic look at your current expenses.
  • When preparing your budget, don’t forget that there are many up-front costs that come with buying a home. This can include a deposit, appraisal fees, legal fees, home inspection fee, survey or certificate of location cost, title insurance, land registration fees, water or septic tests, Estoppel Certificate fees, condo or strata fees, property taxes, utility bills, property insurance, moving costs and other expenses. Use CMHC’s Home Purchase Cost Estimate Worksheet to calculate your up-front costs.
  • Always keep in mind how much you can afford to spend. As a general rule, your total monthly housing costs (including mortgage payments, property taxes and heating expenses) should be no more than 32% of your gross household monthly income.
  • In addition, your total monthly debt load (meaning your housing costs plus any car loans, credit card payments, personal loans, line of credit payments or other debts) shouldn’t exceed 40% of your monthly income.
  • The amount of house you can afford will also depend on the size of your down payment. Once you’ve decided how large a down payment you’re prepared to make, use CMHC’s Mortgage Affordability Calculator to figure out the maximum home price you can afford, how large a mortgage you can borrow, and what your monthly payments will be.
  • If your down payment is less than 20% of the value of the home you want to buy, you will also need to budget for Mortgage Loan Insurance. Mortgage loan insurance helps Canadians buy a home with a minimum of 5% down. Talk to your broker or lender to find out more.
  • After all these calculations, if the numbers don’t look encouraging, you may want to pay off some other loans, save for a larger down payment, lower your target home price, or take a look at your budget to see where you can spend less.

Which mortgage is right for you?

  • When choosing a mortgage, you will have to select between a wide variety of different options. This includes: the amortization period (the length of time to pay off your mortgage); the term (the length of time the interest rate and other options you negotiate will remain in effect); the payment schedule (monthly, bi-weekly, weekly, etc.); open or closed mortgages; and whether you want a fixed or variable rate of interest.
  • Your lender or broker can help you decide which options are right for you. You can also use CMHC’s Mortgage Payment Calculator to compare a few options, and find out how much your payments would be.
  • To give your family greater financial stability and peace of mind, you may want to consider getting a smaller mortgage than the maximum amount you can afford, or reducing your amortization period to pay off your mortgage sooner.
  • When choosing a mortgage, always take into account the impact an increase in interest rates could have on your ability to make your monthly payments.

What is your credit score, and how can you improve it?

  • Your credit score is a number that illustrates your financial health at a specific point in time. It is also an indicator of how consistently you pay off your bills and debts.
  • Your credit score is one of the factors lenders consider when qualifying you for a mortgage. A good credit score, for example, can help improve your chances of being approved.
  • To find out your credit score, contact Canada’s two credit-reporting agencies: Equifax Canada and TransUnion Canada. These agencies can provide you with an online copy of your credit score as well as a credit report — a detailed summary of your credit history, employment history and personal financial information.
  • If you find any errors in your report, notify the credit-reporting agency and the organization responsible for the inaccuracy immediately.
  • If you want to improve your credit score, always pay your bills in full and on time; pay off your debts as quickly as possible; never go over the limit on your credit cards; and try to reduce the number of credit card or loan applications you make.
  • Once your credit score has improved, work with your mortgage professional to obtain a mortgage that works for you.

What is mortgage fraud, and how can you avoid becoming a victim?

  • Mortgage fraud occurs when someone deliberately misrepresents information on a loan application, to obtain mortgage financing that likely would not have been approved if the truth had been known.
  • To protect yourself from becoming the victim of, or an accomplice to, mortgage fraud, never accept money, guarantee a loan or add your name to a mortgage unless you fully intend to purchase the property.
  • Never give out your personal information, banking information, credit card details, passwords, or other personal or sensitive information, unless you know who you are dealing with and how your information will be used.
  • If you are buying or selling a home, use only licensed Real Estate Agents and other professionals.
  • Determine the sales history of any property you are thinking about buying, and have it inspected and appraised.
  • Find out if anyone other than the seller has a financial interest in the home.
  • Get independent legal advice from your own lawyer or notary.
  • Never sign anything until you know exactly what you are signing.
  • Be wary of anyone who approaches you with an offer to make “easy money” in real estate. If a deal sounds too good to be true, it probably is

Mortgage Down Payment Changes

Today Finance Minister Bill Morneau announced changes to down payment requirements. Effective February 15, 2016, the minimum down payment for new insured mortgages will increase from five per cent to 10 per cent for the portion of the house price above $500,000. The five per cent minimum down payment for properties up to $500,000 remains unchanged.

Mortgage Professionals Canada Chief Economist, Will Dunning, is reviewing the full impact of this down payment increase – in particular, on first-time buyers. We will provide further analysis as it becomes available.

In our Fall Report, Dunning discusses why raising the down payment could cause problems for the housing market, including this cautionary observation: “Rising prices have made it increasingly difficult for first-time homebuyers to accumulate down payments. Increasing down payment requirements would, most likely, severely dampen housing demands from people who are financially well-qualified to make their monthly mortgage payments.”

 

 

What Canadians need to know about negative interest rates

By on

First, let’s get this out of the way. Negative interest rates are weird and highly experimental, according to experts, with only a few countries having ventured down the road of negative rates and almost all only recently.

Canada may join them in the event of another global financial crisis, Stephen Poloz, the head of the country’s central bank, somewhat surprisingly revealed on Tuesday, so it’s important to understand what they are and why they would be used.

Global News sought out Carleton University economics professor and monetary policy expert Nicholas Rowe to establish a workable understanding of what exactly negative rates are.

Big encouragement

How do negative rates work, Prof. Rowe? “I would lend you $100 and in return you promise to pay me $99 later. That would be an example of a -1.0 per cent interest rate.”

Deposits held in banks could actually be charged interest instead of being awarded it, too, if some European examples were to come to fruition here (though banks have been reluctant to do so for fear of losing customers).

And how does this stimulate an economy? “Well, that is a big encouragement to go out and spend your money,” Rowe says.

‘The last thing you would want to do is save’

“The lower rates go, the more likely you are to spend and invest. There’s no reason that shouldn’t continue if rates went below zero. The last thing you would want to do is save.”

Negative rates would also help devalue the loonie even more, experts say, providing a shot in the arm to exporters and manufacturers by making Canadian goods more cost-competitive in the global market.

And mortgages?

But what could happen to say, mortgage rates if the Bank of Canada overnight rate went negative? “They would go down.”

In fact, in countries like Denmark where rates have been pushed below zero, some banks are paying mortgage holders a small amount of monthly interest on their home loans, helping homeowners work down their loans.

Prof. Rowe doesn’t see that happening in Canada.

“I think our banks would just sit on currency; find a nice big hole in the ground and fill it full of $20 notes and stick an armed guard over it. It would probably be cheaper.”

“You’d still have a mortgage market, but for zero percent mortgages,” Rowe suggested.

Is this topsy-turvy world of negative rates a possible reality for Canadians in the not-so-distant future?

“I don’t see it being very likely in the near- to medium-term future. There are other things we can do.”

The central bank has other tools, Rowe suggested, and more importantly, the new federal government seems willing and able to apply more targeted fiscal stimulus over the next several years that will likely provide the economic jolt the country needs.

“It’s nice to know [the Bank of Canada] has that in its back pocket, but I don’t think they’ll need it,” Rowe said.

The 10/10 rule: How to protect yourself from a decline in house values

Rob Carrick