Financial Update - Talking to BMO

One on one with BMO economist John Turner

By CMP | Wednesday, 30 September 2009

Some economists are claiming the worst of the recession is behind us. BMO expert John Turner recently spoke with CMP's sister publication, CRE, about what this could mean for the real estate market and interest rates going forward.

There have been whispers that we may be nearing the end of the recession. Can you comment on this?

John Turner: According to BMO's Economics Department, the whispers are turning to shouts. Canadian consumer spending has turned upwards, while the housing market has seen an astonishingly fast recovery. Financial conditions are much improved and confidence is on the mend. BMO Economics estimates that Canada's recession ended in the third quarter, following three consecutive quarterly contractions. Aggressive monetary stimulus and hefty fiscal spending appear to have turned the economy around a little sooner than previously thought.

Do you think the Bank of Canada, by making the announcement on July 23, 2009 that the recession is over, is preparing Canadians for a rate increase (even though it said it wouldn't for 12 months)?

JT: BMO's economists think not. They think the Bank truly believes it won't need to raise rates until mid-2010. The recovery, at least initially, is expected to be soft due to weak U.S. demand. The unemployment rate is expected to climb moderately further, and inflation should remain below target for a couple of years until the slack is absorbed.

It was recently reported that home sales have jumped 40 per cent between January and May 2009. Aside from low interest rates, what other factors could have contributed to buyers getting off the fence and purchasing?

JT: There are a number of contributing factors, including pent-up demand accumulated during last year's downturn, the federal government's tax credit incentive for first-time home buyers, a growing sense that the worst of the global economic crisis is behind us and the government's insured mortgage purchase program which kept the credit taps flowing.

Of course, with interest rates being relatively low, this means lower mortgage payments for both first-time homebuyers as well as others. In some areas, prices have been holding steady and/or decreasing with recent market compression; this has led to better access to homeownership, which is a great investment. Everyone needs a place to live, and buying a home not only fulfils that need but also acts as an important component of a wealth accumulation strategy.

How might the forecasted increase in housing starts affect the real estate market from a buyer's perspective?

JT: BMO's economists expect housing starts to trend higher as the economy recovers, but remain soft for a while as a result of some overbuilding during the previous boom. The rising starts will help to keep the market balanced, since it now risks shifting back to a sellers' market if demand remains strong. The current four-month supply of resale listings is in line with, if somewhat below, historic norms.

The age old debate of fixed vs. variable is alive now more than ever. What should buyers take into consideration when deciding?

JT: It all depends on what the buyer is comfortable with and what they're looking for. Fixed rate mortgages are great for Canadians who are concerned about upward pressure on rates and who are looking for peace mind. With a fixed rate mortgage they get the peace of mind of knowing what their payments are going to be and how much of their mortgage they will have paid down at the end of their term.

On the other hand, variable rate mortgages - when taken over the long-term - have proven to be a winning strategy for Canadians over the last 25 years. Each buyer's circumstances are different and we invite Canadians to speak to a BMO Bank of Montreal mortgage specialist for the best individual advice.

For the rest of the interview, see October's issue of CRE, on newstands now.

Insurance = Lifesavor

Mortgage Life Insurance is a form of protection that will pay off the balance of your mortgage should you or your partner happen to pass away, leaving the other with the remaining mortgage balance to pay down on their own. However, adding on yet another cost when you already feel as though you may be stretched to the limit with your monthly mortgage payments make it fairly undesirable to obtain for most people.

One of the main benefits to this type of insurance is that if it is tied to your mortgage and not to your bank, you are free to move your mortgage as you see fit and not re-apply with higher premiums. Many items on a mortgage application may change once you move into your house - you may choose to have a family and one partner may stay at home to care for the child. If you are down to one income and you lose that income, the mortgage company will still anticipate their monthly payments to be made.

Many people will say that they already have some form of Life or Disability insurance through their employers. These types of insurance are only as good for as long as you are employed through that specific company and may not be enough to cover the balance if they only cover a percentage of your payment.

My personal preference: I always like to put myself in the shoes of the borrower to see what I would do if it were me. Having recently gone through the process myself of obtaining Personal Life Insurance I do see value in Mortgage Life Insurance as a 'bare minimum' but would recommend a slightly different strategy.

We all know that if you decline the insurance now under the assumption that "you'll do it later, once things settle down around your new home" you won't be surprised to find out that you will simply never get around to it.

I accepted the Mortgage Life Insurance when I first moved into my home thinking that I would do the research on my own and if I found a better product I would immediately switch. Two years later and I am finally beginning to do so. Am I a procrastinator you ask? No...

Most of these products offered by Mortgage Brokers have a 30 day free trial. Feel free to sign up for that and if you have all of your ducks lined up in a row, you are covered for one month and then can move elsewhere if you so desire.

The main reason that you would move your insurance elsewhere after the 30 day free trial is up is because personal life insurance is quite often a less expensive alternative and offers more flexibility. For example: 50% pay down mortgage, 25% for children's education fund, 25% savings as opposed to 100% pay off your full mortgage balance with mortgage life insurance.

Moving is a big commitment and even if you aren't sure as to when you'll get around to the insurance side of it all, you should definitely commit to researching all the alternatives and finding the policy appropriate for you.

If you are looking to speak with a licensed insurance broker, I would highly recommend the services of the broker I myself have used in the past.