More and more these days, we are hearing about the strengths of our Canadian Banks, both here at home and in the global marketplace. Below is a recent article from the National Post on this very topic, with comments from President Obama. Have a great week, everyone!
"Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia and Bank of Montreal pushed deeper into the ranks of North America's 10 biggest banks after U.S. counterparts stumbled or disappeared in the past year.
Royal Bank, Canada's biggest bank by assets, is now seventh-largest in North America after tripling assets in the past decade, according to data compiled by Bloomberg from company filings. At the end of 2007, Toronto-based Royal Bank was the sole Canadian firm among the top 10. Toronto-Dominion, Scotiabank and Bank of Montreal rank eighth, ninth and 10th.
Canadian banks have remained profitable, outperforming their peers, because of tighter government restrictions on lending and capital requirements. The country's six biggest lenders reported less than US$20-billion (US$15.7-million) in debt-related writedowns since the credit crisis began in 2007, about 2% of the US$887.1-billion recorded by banks and brokerages worldwide.
"It's a combination of the deleveraging that you're seeing at some of the U.S. banks and, frankly, the relative strength of the Canadian banks," National Bank Financial analyst Robert Sedran said in a March 13 interview. "They've been less disrupted on a relative basis than a lot of their U.S. peers."
While New York-based Citigroup Inc. lost US$17.3-billion in the fourth quarter, San Francisco-based Wells Fargo & Co. had a net loss of US$2.55-billion and Bank of America Corp., the biggest by assets, lost US$1.79-billion, Canada's six largest banks were profitable in the quarter ended Jan. 31, and each beat analyst estimates.
Obama Noticed
Canada's performance has been noticed. U.S. President Barack Obama said in a February interview with Canadian Broadcasting Corp. that Canada has been "a pretty good manager of the financial system and the economy." In October, the World Economic Forum ranked Canada as the soundest financial system.
"The Canadian system is more or less working," Scotiabank Chief executive officer Richard Waugh said in a Feb. 25 interview. "Even during this crisis, we have a lot of good assets on our balance sheet that are earning good, sustainable revenue."
U.S. banks have racked up record losses and received unprecedented financial support from the government in the past year. Shares of Citigroup, once the world's biggest bank by market value, dropped below US$1 in New York Stock Exchange composite trading March 5.
Canadian banks have climbed in rank as U.S. banks collapsed or were bought in the past year. Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection in September and Bear Stearns Cos. agreed to be purchased by JPMorgan Chase & Co. last March. Wachovia Corp., which ranked sixth last year, was acquired by No. 4 Wells Fargo & Co. and Merrill Lynch & Co. was bought by Bank of America Corp., which ranked third at the end of last year.
Assets Triple
A decade ago, Canada's banks failed to make the top 10 list. Royal Bank had the equivalent of US$183.9-billion in assets at the end of 1999, making it the 12th-biggest bank on the continent. Royal's assets more than tripled to US$577.6-billion by the end of January, in part by adding a U.S. franchise based in Raleigh, North Carolina.
Toronto-Dominion has spent more than US$15-billion in the past four years expanding in the U.S., including purchases of Portland, Maine-based TD Banknorth and Cherry Hill, New Jersey-based Commerce Bancorp Inc. The lender's U.S. branches exceed its Canadian network. Scotiabank and Bank of Montreal have expanded from their Canadian base in recent years to increase revenue.
Shares of Canada's banks dropped amid the global financial crisis. The nine-member S&P/TSX Banks Index has dropped 4.2% so far this year, less than the 42% drop among the 24-member KBW Bank Index.
"We've beaten expectations to some degree, but I wouldn't overplay that," Royal Bank CEO Gordon Nixon told reporters in Vancouver on Feb. 26. "The expectation is the Canadian banks will continue to generate profitability throughout this turmoil and I think that's a real positive.""
Tuesday, March 17, 2009
Tuesday, March 10, 2009
Prime Has Dropped Again!
Hello everyone,
This is probably old news for most of you, but the banks have dropped their prime lending rate by a half a percent over the past week! Now, variable rate mortgages are available for as low as 3.25%! And with fixed 5-years as low as 4.19%, what a time to renew or refinance! After crunching the numbers, many clients are finding that even with the penalty of breaking their existing mortgage, they are saving thousands! If you'd like to see what savings might be in store for you, give us a call at 1-877-336-3545 and I'd be glad to run some numbers by you, no obligation!
Here's a recent article on this topic from the National Post:
"Breaking Up With Your Mortgage
Anybody who bought their first house in the 1980s must marvel at mortgage rates today. Or perhaps fume.
Another rate cut this past week from the Bank of Canada led all of the major banks to lower their prime lending rate to a new low of 2.5%.
Consumers who locked into variable-rate mortgages tied to prime before credit markets tanked are getting as much as 90 basis points below prime and borrowing as low as 1.6%. It's the deal of the century.
In October, the banks suddenly changed the rules on borrowing and demanded consumers pay a 100-basis premium over prime if they wanted to go variable. The banks have eased up since and the premium on a variable-rate product is 80 basis points above prime for a 3.3% rate.
It poses an obvious question for anyone who has locked into rates as high as 5.75% on a five-year fixed-rate mortgage: Should they break that mortgage?
"It probably does make sense to break it now," says Vince Gaetano, vice-president of Monster Mortgage.
He gives the example of one client who came into his office this past week with a $205,000 mortgage and a 5.24% interest rate. The customer had 3½ years left on a five-year mortgage. The penalty to break his mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.
In that client's case, his interest rate penalty is calculated based on the current four-year rate at his bank, now 4.14% on a discounted basis. The lost interest to the bank is about $7,800, which is what the customer will have to pay.
It's a big penalty but Mr. Gaetano argues that if that same customer breaks his mortgage and goes with the variable-rate mortgage at 3.3%, the savings would be in the $13,000 to $14,000 range over 3½ years -- more than offsetting the penalty.
There is also a nifty little trick you can pull off if you have a prepayment option on your mortgage. Mr. Gaetano's customer has a 25% prepayment privilege, so he can knock $57,000 off his mortgage and lower his penalty by about $2,800.
"You can access [that 25%] from an unsecured line of credit or some credit cards for a few days and reduce your penalty because the penalty is based on the balance outstanding," says Mr. Gaetano.
While not encouraging people to break their mortgages, the banks are acknowledging that some consumers who locked into higher rates can save money if they refinance at the new lower rates.
"I think it does make sense as an option for some people trying to lower their rate," says Joan Dal Bianco, vice-president of real estate-secured lending at TD Canada Trust.
She says if you are refinancing your mortgage, you can take the interest rate differential penalty and tack it on to your new mortgage. If you have credit card debt, you can add that on too, and the refinancing makes even more sense.
The office of consumer affairs for the federal government has a great site to help you make the decision: www.ic.gc.ca/eic/site/oca-bc.nsf/ eng/ca01817.html. Moshe Milevsky, a professor at York University's Schulich School of Business, who created the calculator used on the government site, says it ultimately comes down to how much money you will save on your mortgage if you break the contract.
To me, it's pure mathematics. There is nothing speculative or probabilistic about the decision to break a mortgage. It is the classic example of undergraduate finance time-value-of-money calculations. If the homeowner can refinance into a mortgage with an identical term that reduces monthly payments above and beyond any penalty costs, then go for it. Plain and simple," says Mr. Milevsky.
Breaking your mortgage based on a decision to go into a variable-rate mortgage is an entirely different decision.
"This decision shouldn't be confused or muddled with the classic long or short decision, or whether real estate prices or interest rates are headed up or down from here," he says.
So, it comes down to two choices: The first is to break your locked-in mortgage and renew for another fixed term. If it saves you cash, that is a no-brainer.
The second choice is whether to switch products and go with a variable-rate mortgage. Historically, consumers have saved money 88% of the time going variable, according to Mr. Milevsky's own studies.
I'm still in the camp that favours a variable rate.
Dusty Wallet This will not save you any money, but if you are strapped for cash because one of the breadwinners in your home has lost a job, the banks will let you lengthen your amortization period. If you have a 25-year amortization you can lengthen it to 35 years without any service charges -- other than the huge jump in interest charges!"
Have a great week everyone!
ps. don't forget to check out the latest article I've posted, "Worthwhile Canadian Initiatives" on my articles page. VERY interesting reading, originally published in Newsweek Magazine a few weeks ago.
This is probably old news for most of you, but the banks have dropped their prime lending rate by a half a percent over the past week! Now, variable rate mortgages are available for as low as 3.25%! And with fixed 5-years as low as 4.19%, what a time to renew or refinance! After crunching the numbers, many clients are finding that even with the penalty of breaking their existing mortgage, they are saving thousands! If you'd like to see what savings might be in store for you, give us a call at 1-877-336-3545 and I'd be glad to run some numbers by you, no obligation!
Here's a recent article on this topic from the National Post:
"Breaking Up With Your Mortgage
Anybody who bought their first house in the 1980s must marvel at mortgage rates today. Or perhaps fume.
Another rate cut this past week from the Bank of Canada led all of the major banks to lower their prime lending rate to a new low of 2.5%.
Consumers who locked into variable-rate mortgages tied to prime before credit markets tanked are getting as much as 90 basis points below prime and borrowing as low as 1.6%. It's the deal of the century.
In October, the banks suddenly changed the rules on borrowing and demanded consumers pay a 100-basis premium over prime if they wanted to go variable. The banks have eased up since and the premium on a variable-rate product is 80 basis points above prime for a 3.3% rate.
It poses an obvious question for anyone who has locked into rates as high as 5.75% on a five-year fixed-rate mortgage: Should they break that mortgage?
"It probably does make sense to break it now," says Vince Gaetano, vice-president of Monster Mortgage.
He gives the example of one client who came into his office this past week with a $205,000 mortgage and a 5.24% interest rate. The customer had 3½ years left on a five-year mortgage. The penalty to break his mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.
In that client's case, his interest rate penalty is calculated based on the current four-year rate at his bank, now 4.14% on a discounted basis. The lost interest to the bank is about $7,800, which is what the customer will have to pay.
It's a big penalty but Mr. Gaetano argues that if that same customer breaks his mortgage and goes with the variable-rate mortgage at 3.3%, the savings would be in the $13,000 to $14,000 range over 3½ years -- more than offsetting the penalty.
There is also a nifty little trick you can pull off if you have a prepayment option on your mortgage. Mr. Gaetano's customer has a 25% prepayment privilege, so he can knock $57,000 off his mortgage and lower his penalty by about $2,800.
"You can access [that 25%] from an unsecured line of credit or some credit cards for a few days and reduce your penalty because the penalty is based on the balance outstanding," says Mr. Gaetano.
While not encouraging people to break their mortgages, the banks are acknowledging that some consumers who locked into higher rates can save money if they refinance at the new lower rates.
"I think it does make sense as an option for some people trying to lower their rate," says Joan Dal Bianco, vice-president of real estate-secured lending at TD Canada Trust.
She says if you are refinancing your mortgage, you can take the interest rate differential penalty and tack it on to your new mortgage. If you have credit card debt, you can add that on too, and the refinancing makes even more sense.
The office of consumer affairs for the federal government has a great site to help you make the decision: www.ic.gc.ca/eic/site/oca-bc.nsf/ eng/ca01817.html. Moshe Milevsky, a professor at York University's Schulich School of Business, who created the calculator used on the government site, says it ultimately comes down to how much money you will save on your mortgage if you break the contract.
To me, it's pure mathematics. There is nothing speculative or probabilistic about the decision to break a mortgage. It is the classic example of undergraduate finance time-value-of-money calculations. If the homeowner can refinance into a mortgage with an identical term that reduces monthly payments above and beyond any penalty costs, then go for it. Plain and simple," says Mr. Milevsky.
Breaking your mortgage based on a decision to go into a variable-rate mortgage is an entirely different decision.
"This decision shouldn't be confused or muddled with the classic long or short decision, or whether real estate prices or interest rates are headed up or down from here," he says.
So, it comes down to two choices: The first is to break your locked-in mortgage and renew for another fixed term. If it saves you cash, that is a no-brainer.
The second choice is whether to switch products and go with a variable-rate mortgage. Historically, consumers have saved money 88% of the time going variable, according to Mr. Milevsky's own studies.
I'm still in the camp that favours a variable rate.
Dusty Wallet This will not save you any money, but if you are strapped for cash because one of the breadwinners in your home has lost a job, the banks will let you lengthen your amortization period. If you have a 25-year amortization you can lengthen it to 35 years without any service charges -- other than the huge jump in interest charges!"
Have a great week everyone!
ps. don't forget to check out the latest article I've posted, "Worthwhile Canadian Initiatives" on my articles page. VERY interesting reading, originally published in Newsweek Magazine a few weeks ago.
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