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By Paul Delean and Mary Lamey
Montreal Gazette
Wednesday, January 16, 2002
Unless you remember singer Connie Francis, you've never seen interest
rates this low.
The Bank of Canada yesterday reduced its key interest rate for
the 10th time in a year, shaving it by a quarter of a percentage
point to an even 2 per cent. It's the lowest level for its key policy
rate since September 1960, when Francis ruled North American music
charts with a song called My Heart Has A Mind Of Its Own.
Banks promptly lowered their prime lending rate by a quarter point
to 3.75 per cent.
Most consumer loans hinge on the prime rate, with borrowers normally
charged anywhere from zero to three percentage points more by financial
institutions. With the prime rate down, new fixed-rate loans will
be cheaper and existing loans with floating rates - such as personal
lines of credit or demand loans for business - now cost slightly
less.
Credit-card interest rates, however, continue to defy gravity and
remain as high as 28 per cent.
Adrian Mastracci, president of
KCM Wealth Management says, “While the borrowers
are having a field day, people trying to get income
from portfolios are facing a huge challenge.”
For every $1,000 on a line of credit pegged at the prime rate,
customers stand to save about $2.50 a year from yesterday's cut.
Compared with the rate a year ago, they're paying $37.50 less a
year for the same loan.
Patricia Lovett-Reid, vice-president and managing director of TD
Asset Management, said that anyone carrying a lot of high-interest
debt, especially credit-card debt, now has a golden opportunity
to reduce the interest burden through a lower-rate consolidation
loan or line of credit.
"It's a great time to look at debt consolidation, assuming
you don't run up the (credit) cards again after the loan."
By maintaining payments at the same level and using any interest
savings to pay down more principal, the debt will be repaid faster,
improving net worth, she said. Taxpayers considering loans to make
Registered Retirement Savings Plan contributions for 2001 also can
benefit, since most financial institutions charge only the prime
rate for RRSP loans of up to one year.
Strong Demand
Mortgage rates also came down after yesterday's announcement.
Most banks cut only short-term rates, slicing 0.25 per cent from
terms of three years or less, but Scotiabank also reduced the rate
on five-year mortgages to 6.60 per cent from 6.85 per cent.
"Demand for mortgages has been very strong for four or five
months. People have been saying that things can't go much lower
and they have been hurrying to lock in," said Scott Brown,
vice-president (mortgages) with Royal Bank.
Oddly, the bank sees more of a rush for new mortgage business when
rates begin to edge up, Brown said. That was the case in the economic
uncertainty after the Sept. 11 terrorist attacks in the United States.
"When rates rose after Sept. 11, people panicked a little,
thinking we had reached the bottom and they were going back up."
Lower rates are bound to have an effect on an already hot Montreal
housing market, said John Kenward, spokesman for the Canadian Homebuilders
Association.
"People do the calculations and see how little the cost of
borrowing is. It's a tremendous incentive, especially in a city
where people have already given strong indication that they are
going to get into the market," Kenward said.
A tight resale market means that more buyers will be drawn into
the new-home market. "It's a symbiotic relationship,"
he said.
Low Returns
The flipside of the Bank of Canada move is that the rate of interest
paid by financial institutions for deposits is about to find a new
bottom. Even before the latest cut, they were paying as little as
1.25 per cent for one-year guaranteed investment certificates. That's
down about three percentage points from a year ago.
"While the borrowers are having a field day, people trying
to get income from portfolios are facing a huge challenge. A lot
of people went short (for guaranteed deposits), hoping for a turnaround
in interest rates that hasn't come yet. Now they're sitting on a
pool of money they really don't know what to do with, " said
Adrian Mastracci, president of KCM Wealth Management Inc.
in Vancouver.
While the Bank of Canada sounded cautiously upbeat in announcing
the latest rate cut, it warned there is still uncertainty in the
economy.
That suggests the bank may trim rates once more this winter but
only if weak economic figures are reported between now and its next
rate-setting meeting March 5, analysts said.
Since last January when the overnight rate was 5.75 per cent, the
central bank has reduced short-term rates by 3.75 per cent in total.
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