The Big Banks Prime rate prior to this rate cut was at 2.85%, so imagine the frenzy this rate cut will create especially for Canada’s big banks.
According to one of our tenants and a thought I am confident has crossed the mind of many before and after the rate cut announcement is ” Will the big banks get on this new rate wagon and how soon would their customers benefit from it? ”
For the purposes of this blog post, i’ll put on my honors “U of T Economics Grad Hat” which has been a great blessing in my life and in my review of economic factors and their impact on the global and local economy we are all a part of. I’ll try to touch on a few reminders which tenants, landlords, property managers/property management companies should keep in mind.
The Bank’s perspective – The rate cut of .5% is a differential too great for any big bank to solitarily or collectively handle or transfer to the everyday consumer immediately or in bulk. Its a great loss to them and it contradicts the very essence of banking which is to make money off the financial instruments they provide to the general public. Examples of such financial instruments are loans ( fixed or variable), Mortgages ( fixed or variable ), Bank of Canada Bonds, Lines of Credit, etc. For this reason I can almost bet my 2 cents, prior to the BOC announcement and in the days to come, the heads of each of the big banks will be at a round table to discuss the impact of the *huge losses* they had prior to and with this rate cut. As of today the big banks are publicly offering between 2.7% or 2.75% , which is merely 10 or 15 basis points.
The Bank of Canada Perspective – Canada’s GDP has been trending poorly and exports are down. Coupled with little to no improvements in employment rate, the manufacturing sector is suffering from a lack of demand for their products or output. A rate cut, yes fiscal economic theory has told us if you reduce interest rates, exports will go up, employment rate should improve over time and consumers will be motivated to buy those “big, shiny objects and big ticket items they otherwise have put off”. Those big ticket items like brand new cars, new or bigger homes, luxurious vacations, cruises, electronics, investments in capital assets, renovations etc. the list goes on.
The Tenant/Landlord Perspective – A rate cut does not change rent negotiation terms between tenants and landlords but it does open up opportunities for both to be “smart” with their money in 2 ways. Save, Save, Save for either a bigger downpayment if you are a tenant hoping to buy real estate in the near future ( 6 mnths to 1 year). By the way, shameless plug but #AgentJumie_RE is my #1 choice for everything real estate. For landlords, this is a great time to review the short term maintenance needs of your properties relative to age/cash flow and make investments which will yield positive ROI , Increased cash flow or improved quality of tenants.
The Property Manager/Management Perspective – A rate cut is great for everyone except Us? The reason being , every condominium corporation has something called a reserve fund, and this reserve fund is often worth millions of dollars by virtue of the monthly collection of condominium fees as well as the saving for a rainy day mindset for budgeting for future expenditures for the buildings. The reality is sometimes in selecting what investment terms these reserve funds should go into, we don’t budget for interest rate cuts. Also often times, the liquidity of the investment is limited or restricted for good reasons which make it somewhat inflexible to simply convert without at least a 90 day time lag. With a rate cut though , i’d encourage any property manager or company currently doing their AGMs, ad hoc forecasting or draft budget for 2015/2016 to monitor and comment on areas where the rate cut has impacted them (positive or negative).
By now, you are wondering what are my personal thoughts on the rate cuts to keep it short and sweet ; i’d recommend the following to everyday people like me who use their talents and expertise to serve others. Our faith for daily bread is that in all seasons God will provide and supply our needs; as such a rate cut is not a windfall, a license to amass debts, or a license to splurge on wants rather than needs or an opportunity to coerce people into consuming more.
1. Pay down as much debt as you can, especially high interest rates or those balances which are negatively impacting your credit profile.
2. The .5% rate cut is essentially savings if you redirect those funds into your TFSA, RRSP, RESP or Savings account.
3. Any capital asset investment you invest in locally or in foreign markets using funds sourced in Canada should have a greater return on investment than the .5% rate cut and enough of a profit buffer for future payments in the event of a rate hike.
4. Do not go and purchase your first home or a bigger home because of a rate cut, enter into the real estate market only if and when you have ( savings , a plan, a strategy designed with the help of a financial planner, a realtor and a mortgage specialist that successfully positions you to purchase your first home, next home or bigger home regardless of rate cuts or rate hikes.
All comments or suggestions above are not to be construed as financial advise; however if you do want to discuss your personal situation i’d be happy to assist with referrals you can speak to and trust.
With head and heart,