Surprising no one, the Bank of Canada chose not to raise interest rates yesterday, maintaining the benchmark overnight rate at 1%, which makes the banks’ prime rate 3%.

From the BoC press release:

The recovery in Canada is proceeding at a moderate pace, although economic activity in the second half of 2010 appears slightly weaker than the Bank projected in its October Monetary Policy Report. In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust. However, net exports were weaker than projected and continued to exert a significant drag on growth. This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.

Aptly summarized by Canada Mortgage Trends:

• Global economic “risks have increased”
• “…pressures affecting prices remain largely unchanged”
• Today’s decision “leaves considerable monetary stimulus in place”
• “In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust.”
• “…net exports were weaker than projected and continued to exert a significant drag on growth”

This is good news for investors and people considering a new home purchase. The fundamentals underlying the recovery in Canada are very strong, and global forces causing the recovery to stretch out a bit will help keep interest rates down longer, with less pressure on inflation.

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The Bank of Canada just dropped the prime interest rate by 0.25% making it….0.25%. The federal banks quickly followed.

Here are the 6 things you should do right now.

1. Call your banker/mortgage broker and reduce your mortgage payments as close to interest-only as possible. Do not go into negative-amoritzation (i.e. where your loan gets bigger).
2. If you don’t already have a reserve fund account, open one. High interest savings accounts are good, but 1% doesn’t really matter.
3. Set up an automatic transfer to your savings account for your an amount equal to your current debt service payment minus the new payment amount. You’re banking the savings on your mortgage and building up your reserve fund. I agree with Don Campbell that we’re still looking at 18 months before we see serious sustained growth in Canada again. Make sure you can stay above water until then.
4. Watch what Mark Carney and the Bank of Canada are saying. Eventually the interest rate will go back up.
5. If you’re losing sleep at night, lock your mortgage rate in. If rates start going up or you have better things to do with your time.
6. Don’t forget, any interest rate below 10% is just fine. Don’t ditch a good bank or mortgage broker over a half percent.

Now go and pick up the phone.

photocredit:Gaetan Lee

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Most people have two phases to their real estate investing. First, they’ve got a little cash for downpayments. Maybe it came from selling their last principle residence, an inheritance, or a buyout or retirement. Either way, cash is the first and most obvious way to go.

Phase two is borrowed money for downpayments and such. The most common is a Home Equity Line of Credit or HELOC. People don’t realize how handy this is, particularly when coupled with one of the mortgage products that automatically converts your principle payments into space on your HELOC. However, for the majority of us, the concern is how much will it cost me each month?

I’m just finishing a mortgage application for an Edmonton condo that I’m using JV money on. The JV share is about $40,000. What’s that really cost my joint venture partner if they use a Line fo Credit? At 4.5%, that’s about $150 per month. But what if rates on the HELOC go up to 6%? Then you’re looking at *gasp* $200. (that was supposed to be sarcastic)

Maybe I’m crazy, but I think that $150 or $200 a month to own a $250,000 asset that throws off positive cashflow that will likely cover your HELOC payment is a good deal.

I’ve made this chart, and linked it to the spreadsheet that you can use or download.

You can view and download the spreadsheet (three tabs) here: Cost of Borrowing.

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Well, the Bank of Canada bucked most predictions of a 1/4% rate cut and held the overnight rate firm at 3%. Now, as I mentioned the other day, there’s a serious split between the economies of the east and the west. I think the fact that the BOC chose to hold the rate steady, rather than drop the rate to encourage growth in the East gives support to the growing economic and political base that the West has become.

I think we’re going to see another cut in the next couple of meetings, but that overall we’ll be up a bit by this time next year.

Thoughts?

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