Bank Rate Down…Line of Credit Rate Up

Most Canadians with a personal line of credit (PLC) or Home Equity Line of Credit (HELOC) are rejoicing as rates come down as our Bank Rate dropped to an all time low 0f 0.5%  that should ultimately lead to a 0.5% reduction in the Bank Prime rate that is currently 3%.

Hold off on re-doing your budget as your interest costs may be going up rather than down. Most people believe that their line of credit adjusts up or down with prime and the premium above prime stays constant.

This is not the case as I found out recently that the small print in some line of credit contracts indicate that the bank can increase the premium above prime at their discretion. I read one contract that indicated the bank could increase rates to as much as 6% above prime and intended to increase their premium by 1% on all lines of credit in April.

While the government is trying to encourage consumers and businesses to spend our way out of recession, banks are taking steps to increase margins and profitability. There is nothing wrong with wanting to increase profitability but one questions the timing based on the struggles that our economy is currently facing.

What are your thoughts on this interest rate increase? Were you aware of a banks ability to increase rates at their discretion? Your thoughts and comments are greatly appreciated.

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Canadian Banks Now Paying 10% For Capital

Bank of Montreal announced through one of their wholly owned subsidiaries, BMO Capital Trust II, that  they will be raising $450 million of capital at a rate of 10.22%. 

For all intensive purposes, this is 10 year money. While the bank can extend the maturity date, it will be somewhat onerous to do so as they should be able to raise new capital at better rates than those indicated if the maturity is extended.

While BMO is the first to offer rates of 10%+, others will follow suit as secondary issues dropped on the day as sellers sold off positions to grab the higher rate on this issue.

With rates like these available on investment grade securities, investors would be hard pressed to place funds into equities right now.

Canadian Banks Ratcheting Down Mortgage Rates

Up until now, mortgage rates have been steady, even with the Bank of Canada lowering the bank rate by 1.50 percent over the last few months with lower rates expected to follow on December 9th. Banks have been holding on to their funds as write-offs relating to lower markets and US mortgage related holdings have hurt their ability to follow suit and lower rates.

Over the last week, Canadian banks have been able to raise some more capital through preferred shares and are comfortable with their balance sheets. As such, I noticed that Bank of Montreal and Royal Bank of Canada lowered mortgage rates with BMO offering a 5 year fixed rate at 4.99% and Royal Bank offering a 4 year fixed at 4.89%.

The lowering of rates will help buyers as they can now qualify for a larger mortgage and allow other buyers to enter the housing market for the first time. With the glut of inventory available, the lowering of rates will be a welcomed sign from a multitude of home sellers as inventories may start to deplete as the affordability will bring more buyers into the system.

What are your thoughts? Do you believe that the lowering of rates will help the Canadian housing market or are we in for a long drawn out downturn?