Newsletter March 2020-1

The changes have been so rapid this year.

1. Decrease in Prime Rate and what to expect.
2. Stress Test will be lower than initially considered.
3. Coronavirus, Trip Cancellation and Travel Insurance.
4. Volatility in investments and how to respond.
5. Global RESP, changes in the company and explanation of a recently sent out letter.
6. Deferred payment on your Mortgage. Is it possible?

Now in more details:

1. Decrease in Prime Rate and what to expect.

Central Bank of Canada has lowered the overnight lending rate twice in a period of just 9 days and each time by 0.50%. Such decrease of 0.50% has been seen before, in years 2001 and 2008-2009. In October of 2001 the rate was actually lowered by 0.75% in one cut. Currently, the overnight lending rate is at 0.75%, but it is very possible that this is not the limit and we may see further decrease. After the financial crisis in 2008, the bank has lowered the overnight lending rate to as low as 0.25%, a level we can easily approach in current situation.
Federal Reserve Bank of America, on March 15th, has reduced the rate to the lowest mark of (0%-0.25%)
Next Central Bank of Canada meeting is scheduled for April 15th, 2020.
It is very likely that the rates will further be lowered at the meeting, and it is possible that it may happen even sooner, in an unplanned meeting, such as on March 13th and already a few times in America.
More importantly, what are the major banks going to do with the additional decrease of already low overnight lending rate in the country?

First two decreases in overnight lending rate of 0.50% each by the Bank of Canada has been supported by everybody.
Prime rate has dropped by 0.50% almost the next day after the decrease in overnight lending rate by Bank of Canada, but after the decrease of another 0.50% on March 13th, banks took some time, however starting March 17th they also decreased their rates by the same amount and now the Prime Rate is 2.95%.

Since it appears that there are more decreases coming up, banks have started to change the terms of their variable rate mortgages. First was TD Bank which reduced the discount on variable rate mortgages from Prime by 0.15% and then by another 0.2%. Another, smaller bank, decreased their discount by 0.2%. The biggest change was seen from Scotia Bank, where the discount on prime rate was decreased from 0.55% to 0.05%. We have also received an update on March 17th, from another smaller bank, about reduction in variable rate discount.
This has happened before, in October of 2008, after overall decline in the economy. Prime Rate was sharply reduced and all banks changed the terms of their variable rate mortgages from minus 0.75% to plus 1.00%. This was shocking, nobody expected this. We can see this happens again now as some changes are already coming.
What is happening with fixed rates?
Fixed rates have also started to increase as the profitability of government bonds increased. However – fixed rate is still at a very low level.
Right now, as the rates are changing daily, it will be very beneficial to go through a section of our website, on how to lock in the best rate for the end of your term for mortgage renewal. https://www.totrov.com/en/mortgage-en/manage-your-mortgage/
I am certain that this is a no loss alternative and everybody would benefit by participating in this program.

2. Stress Test will be lower than initially considered.

Starting April 6th of 2020, Stress Test will be calculated differently. I have provided a detailed explanation in my previous letter but would like to come back to this topic.
Bank rate (posted rate), that is used for calculating the Stress Test, will be set the following way – average rate of all banks on insured mortgages with a 5 year term, offered that particular week (insured mortgages are mortgages with less tan 20% down payment), plus 2%.
If we compare, what the Stress Test can be today, it will be approximately 4.49% and 4.59%, as today the banks are issuing insured mortgages with an average rate of 2.49% and 2.59% (depending on the details of calculation).
If we add 2%, we will get 4.49% or 4.59%, which is 0.60% or even 0.70% less than the current level of Stress Test (5.19%). This approach of calculating qualification rate is currently used for the insured and other (uninsured) mortgages.
This lower qualification rate will surely help many.
Level of Stress Test can be recalculated weekly if there are changes on market rates on mortgages with insurance from CMHC, GW, CG.
Of course, there is still time until April 6th and the banks are increasing fixing rates again, but let’s hope it will not be a large increase and the new stress test will be even lower that the expected 4.89%.

3. Coronavirus, Trip Cancellation and Travel Insurance.

You are aware that we sell a lot of insurance policies for travellers abroad and visitors. Currently, due to COVID-19, the situation with travels in both directions is uncertain. You can always call our office and consult regarding existing coverage or on obtaining new coverage.
Unfortunately, now that we are full aware of the issue with the Coronavirus, we are unable to purchase trips and receive refunds based on Trip Cancellation, if the coverage was purchased in the middle of March. If however, the coverage with Trip Cancellation was processed prior to announcement of the pandemic, the ability to cancel and get a refund is available.
Medical expenses out of country will not be covered if the person is leaving Canada even if an insurance coverage has been bought in advance.

On the 13th of March, 2020 Canadian Government issued a warning re Canadian people going abroad due to pandemic so insurance companies will not accept any requests for coverage outside of Canada.

4. Volatility in investments and how to respond.

From time to time life brings us surprises, and year 2020 also brought us quite a surprise. Investment markets are in panic mode and it is not a good idea to fall with the hysteria and taking funds out of your investments at this time. On the contrary, this is the time to contribute more money to the investment market.
I have investment licence since 1999 and have witnessed the market in 2000-2001, 2008 and other smaller volatilities. The world has not stopped, life goes on and the investment market will move forward and up, there is no other way. Those that have made investments with a few years’ goals should not panic and should stay the course, continue to hold the money in the market. You can always contact our office and set up a phone meeting or even come in person. For now, here is a data on volatility of the Canadian investment market from 1955 to 2020.

5. Global RESP, changes in the company and explanation of a recently sent out letter.

Those who have a savings account with the Global RESP program have recently received a letter that may be a little unclear on what is going to happen with the existing plans opened through Global RESP.
I would like to offer a little clarification: as of this moment, Global is not able to accept new clients, the company is also unable to increase contributions on existing plans.
The existing plans will continue to work without any changes.
You will continue to receive a 20% Grant or more on your contributions and the interest will not be taxable up to a point where the child begins his/her education. Your program has been unchanged.
I want to assure you that regardless on what is happening with the Global RESP, your contributions are safe with the Bank of Nova Scotia in Ottawa, separate from the Global RESP assets. Responsibility of investing is with several companies: Scotia Institutional Asset Management, UBS Investment Management Canada Inc and Yorkville Asset Management inc., Toronto.
Another good news: losses in the investment market do not affect you. Global RESP does not invest in mutual funds, only in government bonds, which is a mandatory requirement. That is why the return has been fairly low over the past couple years, but now has become an advantage, when the investment market is so volatile.
If you would like to increase your contributions into children’s program, please contact our office and we will offer you some plans where you can make additional contributions.
If you are looking to open another education plan for another child please contact us, we are brokers and are able to open an RESP plan with any financial institutions. If you have any further questions on this program contact our office.

6. Deferred payment on your Mortgage. Is it possible?

Due to the unfolding situation, the banks decided to offer some relief to their clients and are now allowing to postpone mortgage payments. Some banks already had conditions in their contracts allowing to skip a payment, this was mostly not the case with many smaller institutions.

Postponing a payment will be considered on a case-by-case basis. I am aware that it is extremely difficult to get to customer service of your lender right now with increased volume of phone calls in this financial situation. I believe that the best way to approach it at this time would be by sending an e-mail to your bank with a request to assess your eligibility for the payment deferral. To be clear, it is highly unlikely that the banks will not charge interest, it is more likely that the extra amount will be added to the balance of the overall debt. This however should still be helpful for some.

We hope to hear from you or see you soon.
Our office is open 9 a.m. to 9 p.m. and Saturdays by appointment.

Serguei Totrov
Financial Advisor, CFP, CLU, EPC
Mortgage Broker, AMP
416-222-0533
www.totrov.com

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