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Posts Tagged ‘federal budget’

TD Bank To Impose New Services Charges on Lines of Credit NOT IN USE!!!

Thursday, January 29th, 2009

<Sigh>

Banks and service charges. Never was a more larcenous crew allowed to publically ply their trade until the banks got into the mix. With credit increasingly hard to get, TD has taken the step of now charging a $35 annual “inactivity” fee. Also, for those people that ARE using their lines of credit, the rate is rising from 3.9% to 4.4% above TD Prime Rate. BMO has also stepped up and increased interest on their lines of credit. Some people within the banks are saying that there is a cost to keep lines of credit open, even if you don’t use them. While this is true, it was never an issue before, but mounting loses in the financial sector, and tough lending costs to banks, has them passing the cost along to us.

WHEN PRIME RATE FALLS, OUR RATES DON’T ALWAYS FALL AS WELL

Every time there is the announcement that the Bank of Canada is lowering rates, my phones light up with calls with people wondering why their rate hasn’t fallen on their lines of credit, or mortgage, or what have you. The reality is that the banks must earn a profit on their business, or they won’t offer the product. With prime rate falling to record lows (currently 3% at most banks) the cost to borrow has never been cheaper. However, in an effort to make up some flagging profit margins, the banks are raising the discount from below prime to prime plus some amount. For example, lines of credit (secured) were typically prime rate for the past several years. With prime rate now soooo low, banks aren’t making enough money on the lines of credit to warrant servicing them. They are increasing rates anywhere from 1% to 2$. Sure, it’s still tied to prime rate, but now it is prime plus 1% up to prime plus 2% depending on your institution.

Bottom line: we can’t expect rates to fall forever. Eventually, the profit initiative will kick in. I’ve been shaking my head every time prime rate falls and the banks all scurry to follow the Bank of Canada. I’ve been calling for a while now that discounts will be eroded on lines of credit, and given that they are an OPEN credit facility, the bank can change the rates on you at any time, just like you can pay it out at any time and walk away. In the eyes of the bank, what is good for the goose, really is good for the gander.

I am re-publishing below, the article written by Sarah Schmidt in the Vancouver Sun:

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OTTAWA — Despite interest relief from the Bank of Canada, at least two of the country’s big banks are
increasing the borrowing cost for customers who tap into their lines of credit, and one is charging a new fee for those who don’t use it.

TD Canada is introducing a new $ 35 “ inactivity” fee in April for customers who don’t use their unsecured line of credit over the course of a year.

For those wo do, the interest rate is rising from 3.9 to 4.4 per cent above TD Prime, beginning March 1. The Bank of Montreal is also raising the borrowing cost for its unsecured line of credit by one per cent, from two to three per cent above BMO Prime, beginning March 4. The bank is not introducing any penalty fee for customers who don’t use their line of credit.

The changes were revealed in private correspondence to customers in recent days, just as the Bank of
Canada on Tuesday chopped its key lending rate by 0.5, to 1 per cent.

The banks, along with the rest of Canada’s big banks, immediately announced they were passing on the full measure of the latest interest-rate relief by cutting their prime lending rates by a half-point to a record low of three per cent.

The banks also announced reductions in some fixed and floating-rate mortgages. In a statement, a TD spokeswoman defended the decision to raise the cost of borrowing on its unsecured line of credit, saying it reflects “ the continued rise in the cost of lending.” Kelly Hechler added, “ We are working to balance our customers’ goals with prudent business practices, which is especially important during the current economic downturn.”

She also said the new penalty for inactive files is fair because there is a cost associated with maintaining them.

BMO spokesman Paul Gammal said despite the increase, the bank’s unsecured line of credit remains an attractive product for consumers. “ From our survey of the market, our personal-line-of-credit offering is competitive and, in fact, favourable, compared to some of our major competitors.”

Glenn Thibeault, consumer affairs critic for the New Democrats, wasn’t moved by that defence.
Thibeault singled out TD’s new inactivity fee as egregious. “ That one to me is just mind-boggling. You finally pay off your debt, and you get penalized for it.” A spokesman for Scotiabank said the company does not currently charge nonactivity fees on its lines of credit. He also said he would not speculate on any possible future interest rate changes. RBC and CIBC could not be reached for comment about whether their borrowing costs on unsecured lines of credit will be rising alongside TD’s and BMO’s.

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So what do you think? Banks win again. Common theme to this blog lately…

2009 Federal Budget Has Some Interesting Savings for Canadians

Wednesday, January 28th, 2009

With all the economic problems in the world, Canada has not been immune. There are many ways that the government can stimulate the economy: monetary policy, fiscal policy, massive spending programs, taxation, tax breaks, etc…

Today was the release of the 2009 budget, and it contained many nuggets for Canadians as the government tries to inject capital, spending, and tax breaks into the economy.

A couple of highlights include the following:

1. The basic personal tax exemption (the amount we can earn before paying tax) was increased from $9,600 to $10,320.

2. Creation of a Home Renovation Tax Credit that will provide up to $1,350 in tax relief for home renovations between January 27, 2009 and February 1, 2010. Approximately 4,600,000 families are expected to benefit.

3. $200 billion injection into the capital markets to improve access to credit and liquidity.

4. Protecting the serverance pay for employees when companies declare bankruptcy.

5. Additional housing for seniors, disabled, and natives on reserves to the tune of $1,000,000,000.

6. Making the construction and building application process more streamlined and efficient.

7. Cabinet ministers and their staff can no longer fly business class for trips under two hours.

8. 100% Capital Cost Allowance for all computers and software purchased over the next two years.

9. Small business tax cap increased from $300,000 to $400,000 in revenue.

10. $200 Billion in government financing made available to businesses to improve credit liquidity.

Some of the changes directly impact real estate and first time home buyers in particular. For example, first time home buyers will now be able to take out $25,000 of their RRSP (tax free) as a first time home buyer withdrawal. At the same time, the government will be willing to provide up to $750 in tax relief to first time home buyers to help cover closing costs. Additionally, the renovation tax relief will be a 15% tax credit on all renovation spending to homes over $1,000 up to $10,000. This includes renovations to substantially improve a home – the structure or building – not appliances and furniture or other items that could be taken from house to house.

The way the $750 tax credit works is a little convulted (as are all government programs where tax relief is offered in lieu of cash). The government will allow a $5,000 n0n-refundable income tax credit on qualifying homes after January 27, 2009. For someone that is eligible, that means up to $750 in tax relief. You will have to consult the new budget for more details on this program.

MY OPINION OF THESE CHANGES

There is no doubt that these moves will inject billions into the economy, and will hopefully grease the wheels of lending and liquidity to get businesses and individuals borrowing again. However, some of the changes, such as the $750 tax credit seem rather like a small drop in a very large pond. While I believe the government’s and legislator’s heart is in the right place, I have never seen a deal live and die (nor a person’s financial strength) swing from good to bad on a $750 tax credit. I would much prefer to have individuals qualify, up front and prior to closing, and have the government direct the funds right to the solicitor. This would be a $750 lump of cash that first time home buyers can feel! While I understand the benefits of tax credits, I also feel that making people pay up front, and get credited later, is a plan where the effect gets lost in translation. It is sort of like saying that you owe $2,750 of tax, but we’ll credit you $750 so you only owe $2,000. A good tax break, to be sure, but wouldn’t it have been better if the citizen got to keep the money in their pocket when they earned it rather than have to wait all year (earning no interest) and gotten it back later? Perhaps that is my personal bias coming through…

A DROP IN THE WELL WHICH HATH ALREADY RUN DRY?

As I read and re-read the government injection billions into the system, and making financing for business available, I hope that all this isn’t like throwing a cup full of water down a very dry and already empty well. My personal feeling is that the lending markets (particularly mortgages) got way, way, way ahead of themselves and ahead of prudent lending practices. Those debts don’t just go away, and while it is nice that borrowers now are going to be able to take advantage of some new financing, those debts (and all associated payments) are still due and owing every month. The problem isn’t JUST that financing isn’t available, it is that the delinquency rate on debt already funded (under the old loose guidelines) is still out there and needing to be paid. I think that this is the beginning of a long, slow descent for property values, and that anyone thinking of buying an investment property should think long and hard before doing so. I myself am looking for a single family home at this point, and this in spite of my thoughts that prices may fall. Why? Because ultimately, I need a place to live, and I will build up equity through the only way that I know how: hard work. It’s the only way I know how to pay back debt, and this country (though not as bad as the US) has a lot of hard work ahead of it.

I applaud the government for taking these steps as it means they DO realize how dire the situation in the credit markets really is. Now, we get to see if this massive cash injection can make a dent in a market already pounded flat.

Happy investing!