For 2013 we can expect a fragile US economy, a flat Canadian housing market, low returns on North American Equity Markets, low growth in developed countries, increasing Central Bank debt and continued stress on Insurance Companies, Pension Funds and Banks to generate returns.

The Good News: Low mortgage rates for Canadians for the foreseeable future.

The Bad News: If the Banks aren’t making money in the financial markets, you will pay for it!

For the past 4 years Canadians have experienced low interest rates, and low growth. With the exception of a few good numbers for employment, retail spending and housing, not much has changed with respect to the health of our overall economy. For those of you watching every tick on the Bond Yield curve (like me), the recent increase in Bond yields which has translated into a slight increase in mortgage rates is a result of some positive economic data coming from the US. We don’t believe that this will last.

Be careful of Messengers with Motives

Our clients have benefited from low interest rates and we sincerely believe that they will continue to do so. Economists from the major Banks are beating their drums for Canadians to lock into long term fixed rate mortgage contracts. And who can blame them. After all, the Banks make more money when you lock into a fixed rate and even more money when you break a fixed rate mortgage. No one is really advising the consumer as to what might be best for the consumer.  If you are trapped in a fixed rate mortgage and have been quoted an extortionate penalty to break it please give us a call, we love catching the Banks where their hand in the cookie jar. We even have a website that can help when you’re breaking your mortgage, it is aptly named, breakyourmortgage.com.

We can all agree that the Banks send out their Economists to advise consumers based on what is best for the Banks bottom line. If the Canadian Banks can increase the demand for Fixed Rate Mortgages and make a healthy spread for years to come while locking clients into mortgages that seem to be ever more costly to break they are doing their jobs and will be rewarded with higher profits. If they do what is best for the consumer and advise them on how to reduce their debt costs and penalties we would live in the land of make believe and the ice related car accidents on our slippery gold paved roads would be the biggest problem we would have to deal with.

Over the past years we have struggled to save money, find jobs, and keep up with our debt payments in a very fragile economy while the top 6 Canadian Banks have reaped ever greater profits. Last year those profits totalled almost $30 Billion (want to see what the Banks have made in PROFIT over the past 5 years? Click Here).  As we have struggled the Banks have used the money we deposit with them to generate huge returns. They have expanded by buying low cost forward thinking deposit takers like ING and Ally Bank. They have affected great policy change in Canada which will allow them to make more money on the debt they issue consumers well into the future. The consumer must begin to think more proactively (have a look here at a piece we wrote last year on how to eliminate bank fees).

Why we need to be careful

Since 2008 the Banks have been unable to make as much money from their investments in Equity Markets. Retail Investors have had their life savings eroded and are gun shy about returning to an investment marketplace dominated by large financial institutions. If the Retail Investor stays away from the financial markets it will be difficult for equities to rally enough to feed the bloated Insurance Companies Pension Funds and Banks that require a minimum 5% return to survive. For the Banks this presents more of a challenge than a problem. The real problem is transferred onto the consumer in the form of increased fees and penalties. We continue to assert that the Canadian consumer should not be dealing with their Bank directly when negotiating anything.

Mortgage Penalties from the Big 5 Banks are higher now than they have ever been. We recently encountered a disgruntled former Bank customer who was asked to pay an Interest Rate Differential Penalty of $32,435 on a $193,000 mortgage. We worked with the customer to reduce the penalty but are ourselves quite confused as to why The Canadian Government is no closer to reining this in than they were 5 years ago.

Canadians be careful, although 2013 will see low interest rates and lots of mortgage rate competition from the Big 5 Banks, it will be characterized by high penalties and fees, after all $30 Billion in profit has to come from somewhere.