What Does it Mean to Co-Sign a Mortgage?

There seems to be some confusion about what it actually means to co-sign on a mortgage and that confusion is exactly why you need to talk with a trusted mortgage professional that will seek to offer clarity.  First let’s look at why you may be asked to co-sign and what you need to know before, during and after the co-signing process.

Why are you being asked?  Last year we saw two sets of changes made to the mortgage world which can likely explain why you are receiving this request in the first place.

The first occurred early in 2016 whereby the overall lending standards were increased in regards to an individual’s management of their credit and the resulting responsibility of Canada’s financial institutions to ensure they are lending prudently.  We have seen an increase in requests for co-borrowers to help strengthen applications when credit or job stability is an issue.

The second happened in late 2016.  A new “Stress Test” rate applies which has especially impacted borrowers with less than 20% down.   They must qualify at a rate of 4.64% though their actual interest rate is much lower.  This has decreased affordability for many which means they could be looking for a co-borrower to increase how much home they can qualify for.

You need to ask questions as to exactly why the applicant needs a co-borrower.  If it is a credit issue then you need to assess if that is an acceptable risk – credit issue can be newly established credit or bruised credit. If it is a matter of not enough income, you need to assess that instead.  What is the exit strategy for you all from this joint mortgage?

What can you expect?  You will be required to complete an application and have your credit pulled.  As you are a borrower the banks will ask you for all the documentation that the main applicant has already provided.  This can include but will not be limited to:

  • Letter of Employment
  • Pay stubs
  • 2 year Notice of Assessments
  • Mortgage Statements on all properties you own
  • Bank statements if helping with the down payment
  • Property Tax bills
  • Divorce/separation agreement

In closing, the main point I want all co signers to fully understand is that the application is based on your Income and Liabilities only.  The purchaser Income and Liabilities is not taken into consideration on the application when a Co Signer is being used.

To fully understand your role as a co-signor, give me a call today!

Carolyn Munro

Cell: (204) 574-6353

Email: carolyn_munro@centum.ca

Home Buying: A Long Term Affordable Investment

One of the largest investments you make in your lifetime is a home purchase.  It can be scary and with all the media surrounding interest rates, housing costs and high level of debt Canadians are carrying it can make your head spin. However, buying a home is still an affordable, long-term investment espcially when you factor in today’s low rates.

Here is something for you to think about. In 1990, the average house price was $130,000, the average rate was 12%. This would mean your payment would have been $1,341.47 a month. The amount of interest paid over a 5-year term would have been $42,367.

Now, let’s compare to 2016. The average house price is $315,000 with a rate of 2.69%. You would be looking at a monthly payment of $1441.07. The amount of interest you would have paid by the end of your 5 year term would be $21,886!!!

The reason why I wanted to illustrate these scenarios was to offer some perspective on how affordable houses still are. While the initial down payment can be an obstacle for some, we do have programs that help you with a flexible down payment. And while a monthly rent payment helps pay down your landlords mortgage, a home purchase is a long term investment in yourself through the building of equity within your home. Today’s low rates allow you to apply more money to the principle payment on your house rather than the interest paid to the bank.

I can’t stress enough the importance of working with a mortgage professional like myself who can offer you insight and guidance. Call me today!

 

Carolyn Munro

Cell: (204) 574-6353

Email: carolyn_munro@centum.ca

What it Means When Prime Rate Changes

With the recent increase that TD has made to their Prime rate, it leaves a lot of mortgage holders with a variable rate questioning what this means to them. Let me tell you.

First, it is only TD that has recently changed their Prime rate from 2.7% to 2.85% – so far anyway. Typically once one lender makes that change, the rest will eventually follow but for now, this only affects you if you have a variable rate mortgage with TD bank.

When a bank decides to raise their Prime rate, it could mean you will have an increase in your mortgage payment to cover the extra interest but each bank does have the option to leave your mortgage payment the same and instead adjust the amount of your mortgage payment that will go toward your principle balance vs your interest. Meaning, a little more of your mortgage payment will be going to interest and a little less to principle. This will cause you to pay more interest over the term and will leave you with a higher balance at maturity.

This is just one of the many changes that have happened in our mortgage world over the last few weeks. If you are concerned with how these changes may affect your ability to buy, your current mortgage or even your future renewal options, please don’t hesitate to contact me.

Naomi 1

 Naomi Hamm, Mortgage Broker & Partner

 Office: (204) 727-2177

 Cell: (204) 724-7290

 Email: naomi_hamm@centum.ca

Home Inspections

What are their purpose and why are they important?home-inspection

The purpose of a home inspection is to reveal any defects or flaws that a property has, so that potential buyers can make an informed decision and avoid costly surprises down the road. During an inspection, the inspector will investigate every room in the home to identify and assess possible underlying health and safety issues; they will look for structural issues, water damage, working appliances, insect or pest problems and even forecast potential future expenses.

What do they mean for homebuyers?

An inspection report can help a homebuyer decide if a property is a good fit for them or if it has too many problems to deal with, and they should consider re-evaluating. It can also be useful during pricing negotiations because it discloses issues that would likely cost the buyer additional money above the purchase price to repair; buyers can use the report to request the seller to make the necessary repairs or reduce the asking price.

Who should attend the inspection?

It’s a good idea for the buyer and their REALTOR® to be present during the home inspection so that they can ask questions and fully understand any issues if they are discovered.

Are home inspectors licensed?

In Canada, only two provinces have licensing requirements for home inspectors: British Columbia and Alberta. The Canadian Association of Home and Property Inspectors (CAHPI) has established standards of practice and codes of ethics and will award a professional designation to inspectors who meet all of the regulations.

What are the top issues to consider when purchasing a property?

Any property can host a variety of defects, but some of the pricier issues that you need to be on the lookout for include:

  • Structural problems
  • Pests and termites
  • Water damage or plumbing defects
  • Mold and asbestos
  • Wiring and electrical issues
  • Heating and air conditioning malfunctions
  • Well water complications
  • Roof leakage

 

How to Use Prepayments to Be Mortgage Free, Faster!

Using your mortgage prepayment options can drastically reduce the total amount you spend on your mortgage and shorten the time it takes to pay it down.. If you follow these three steps, you can be mortgage free sooner than ever!

1. Know your prepayment privilegesMORTGAGEPAYMENT
Most mortgages have allowances for you to prepay down your mortgage faster. The standard prepayment amount allowed per payment can vary depending on your mortgage provider.

We can work together on your goals to ensure you have the flexibility you require to pay your mortgage faster. Your mortgage provider may be able to increase and decrease your prepayment privilege at any time throughout the life of your mortgage.

This means that if any life event occurs and you need to reduce your payment to the minimum, you can with ease. Most mortgage providers allow this free of charge, but with some providers you can only change your payments a set number of times throughout the year.

2. Increase your payments
Anytime you increase your payments, the excess that you pay per payment goes directly onto the principal portion of your mortgage. This is a great way to drastically reduce the interest you will have to pay over the term of your mortgage.

Typical prepayments allow you to add between 10% to 20% of your payment amount to each payment, depending on your lender. Some lenders also allow the use of “double up payments” which let you double each payment!

Here’s an example of prepayments being used on a typical mortgage:

All calculations are based off of a $400,000 mortgage with a 5 year term and 25 year amortization at a rate of 2.59% with monthly payments.

No Prepayments:
Monthly payments: $1,809.84
Principal paid over 5 year term: $60,836.51
Interest paid over 5 year term: $47,753.89
Mortgage amount remaining: $339,163.49
Years remaining on mortgage after 5 years: 20 Years

Adding a 15% Prepayment:
Monthly payments: $2,081.32
Principal paid over 5 year term: $78,201.00
Interest paid over 5 year term: $46,678.20
Mortgage amount remaining: $321,799.00
Years remaining on mortgage after 5 years: 15 years & 9 months

As you can see, the mortgage was reduced by $17,364.49 and saved $1,075.69 in interest! The mortgage term was reduced by 4 years and 3 months in only 5 years!

3. Make a lump sum prepayment
Making a large payment can be a great option for paying down your mortgage, but may not be ideal for everyone. Lump sum payments help you reduce the amount of interest you will be required to pay on your mortgage. They can also be used to reduce your mortgage amount before selling your home and will reduce the penalty you will be required to pay.

Lump sum payments are usually between 10% – 25% of the mortgage total. Typically, you can make a lump sum payment onto your mortgage once a year. Every mortgage provider has their own specific guidelines for how you can make a lump sum payment in a calendar year. Your provider may require you put down a minimum amount for a lump sum prepayment, or you may only be eligible for one on the anniversary date of your mortgage.

If you decide that prepayments are for you, you can achieve mortgage freedom sooner than ever!

Contact me today and lets set your goals into motion.

IMG_2894 Chris Turcotte, Owner/Broker

 Office: (204) 727-2177

 Cell: (204) 720-4002

 Email: chris@christurcotte.ca

 

5 Ways to Damage Your Credit Score

1) Making Late Payments

  • In general, your payment history has the strongest impact on your credit score. About 35 percent of your Equifax Credit Score, for example, is based on your payment history. That means that any late payments – whether on your credit cards, an auto loan, your mortgage, or another credit account – could cause you credit score to take a dive. Your late payment history will stick around on your credit report, too. For example, one delinquent payment that is 30 days late can remain on your credit report for up to seven years.
    • Tip: Paying your bills in full and on time should reflect positively on your credit score. To avoid a late-payment blemish on your credit report, consider using automatic payments or setting up electronic payment reminders on your phone or computer.

2) Racking Up High Balances

  • Your credit score also takes into account your credit utilization (how much of your available credit you are using). A high debt-to-creidt ratio – meaning that you are borrowing a significant portion of available credit – will generally have a negative impact on your credit score.
    • Tip: Work on keeping your ratio of debt to available credit as low as possible to help boost your credit score. Avoid carrying a balance of more than 30 percent of your credit limit because if you take on any more debt, lenders may view you less favourably. If you are carrying debt, work on paying if off as quickly as possible. Paying off your current debt may open up some of your available credit

3) Applying for a lot of Credit at Once

  • If a creditor or lender accesses your credit report because of a transaction you initiated, it will trigger a hard inquiry on your credit report. If you apply for too much credit over a short period of time, triggering many hard inquiries, your credit score could drop and lenders may view you as a higher risk.
    • Tip: Because credit scoring models consider your recent credit activity to evaluate your need for credit, only apply for credit when you really need it to avoid overextending yourself.

4) Closing an Account

  • Closing one of your credit accounts could reflect negatively on your credit score because if will change your credit utilization. If you close an account, you may lower the combined credit limit on all of your accounts, making your debt-to-credit ration appear higher.
    • Tip: While positive credit behaviour – such as paying your bills on time – will reflect positively on your credit score, you don’t need to carry a balance on all of your accounts. Instead of closing an account, consider paying off a small purchase on the account every few months, which will generally get reported to the credit reporting agencies.

5) Having a Short Credit History

  • About 5 to 7 percent of your Equifax credit score is based on the length of your credit history, and the score considers both the age of your oldest account and the most recent account opened. If you do not have at least one credit account open for at least six months or if you do not have at least one credit account in the last six months, you man not have a credit history or credit score. Without a credit history, it is difficult for creditors to determine your creditworthiness when making decisions about extending you credit.
    • Tip: If you plan to borrow money in the future, start thinking about establishing your credit history now. If you don’t have a credit history or you have a thin file, consider opening a retail, gas or low-interest credit card in order to start building a positive credit history.

Know where you stand: as you work on boosting your credit score, make sure to regularly monitor your credit report so you know where you stand. If you spot any errors on your credit report, file a dispute with the necessary agency to have the erroneous information corrected as soon as possible. 

 

Source: Equifax.com

Property Tax Payment Explained

property taxesJune 30 – a dreaded day in Brandon. The day property taxes are due for the current calendar year.  If you own a home and you have not already received your property tax bill in the mail, be sure to contact the city as they are due whether you receive your bill or not!

Since property taxes are due in the middle of the year, it can make it a little confusing for first time buyers (or second and third time buyers for that matter) so I thought I would share with all of you what I have learned over this last month or so.

We’ll start with the basics first. You do have options when it comes to paying your property taxes:

  • You can pay them all in one lump sum to the City on the Due Date
  • you can go on the City of Brandon’s TIPPs (Tax Installment Payment Plan), where you will pay 1/12th of your property taxes each month to the City through automatic withdrawl from your bank account
  • you can pay them along with your mortgage each month (or biweekly if that’s your payment schedule)

If you can afford to pay your entire property tax bill at once, that’s great, then it’s out of the way and you don’t have to worry about it for another year. But if you can’t, then I personally recommend the TIPS program as it seems to be the most simple. The City is the one that revises property taxes each year so if your taxes do change from year to year, they send you the bill along with the adjusted monthly payment amount you can expect.

Paying your property taxes with your mortgage through the lender can be a bit more complicated in the beginning but does even itself out for you over time. When you pay your property taxes this way, the lender will set that portion of your payment aside in a tax account and then when your property tax bill comes, they pay your taxes on your behalf to the City using that money from the tax account. Where it can get tricky is if you have not lived in your home for a full year as you will not have paid enough in that tax account to cover the amount the lender needs to pay on your behalf. Not to worry, normally the lender will still pay the taxes in full and then they will adjust your mortgage payments over the next year to make up the difference of anything they over paid for you.

That’s the easy part, now let’s get into the complicated part. When you take possession of you house, the new bank wants to be sure that property taxes are all up to date so in an ideal world, we’d all take possession of our new home on Jan 1 each year. This would make it unnecessary to do a property tax adjustment with the lawyer during closing.

We all know this is not the case. So let’s use an example of a May 1st 2015 possession and a property tax amount of $3000/year. Since you own that house on June 30 2015, you are responsible to pay that entire $3000 for the 2015 calendar year. Doesn’t seem fair since you did not live in the house from Jan 1 – April 30 2015. This is where the property tax adjustment comes in. When you meet with your lawyer, (s)he will make the adjustment so that you are being compensated for those 4 months that seller owned the home. How the lawyer does this is (s)he will figure out how much the property taxes were from January – April:

$3000/12 months = $250/month x 4 months = $1,000 is the sellers portion of the years taxes

Then lawyer will take the $1000 the seller owes for property taxes and take it off the purchase price (let’s say $200,000), so $200,000 – $1,000 = $199,000. He also adjusts deposits etc but we’ll leave that out as I just want to focus on the property taxes, not the closing costs. This means now the amount you pay the seller reduces to $199,000 instead of 200,000 so the lawyer will keep this money and use it toward the closing costs.

One thing to really be aware of is this $1,000 is for the property taxes from Jan – April 2015. You don’t physically see this money come to you from the seller because the lawyer just adjusted what you are paying for the lawyers services. It’s a little simpler than you paying $200,000 and then the seller giving you back $1,000. It’s 6 of one, ½ dozen of the other.

Keep in mind, now you are responsible for the entire 2015 year of property taxes, all $3,000. If you want to now get set up on the TIPPs program through the city, you will have to take that $1,000 you saved on your closing costs and give it to the City, along with the payments for May and June (an additional $500) to get the taxes paid up to June 30 and then the City can set you up on TIPPs and will withdraw the payments on a monthly basis for July 2015 and so on.

If you are paying your property taxes through the bank with a May 1st possession, you will only have made 2 payments of $250 by the time your full year of taxes are due. Therefore, the lender will be paying the $2,500 (that you don’t have yet) on your behalf and you’ll have to make up for that over the next year. They will adjust the tax portion of your mortgage payment accordingly. This would give you a fairly large total mortgage payment for the year but then when you are caught up, your tax payment should come back down to normal. I have suggested that clients put that $1000 toward their taxes up front so they have less being paid on their behalf by the lender, therefore having a smaller balance to make up over the next year.

Now let’s have a quick look at a possession after the taxes are due, possession date of Sept 1 2015. At this point, the property taxes for your new home have been paid in full for all of 2015 but of course the seller doesn’t live there for September – December so now you will owe the seller some money when your lawyer does the closing. Again, using $3,000 ($250/month), you would owe the seller $250 x 4 months so $1,000. Just as before, the lawyer would do the adjustment and instead of taking $1,000 off the purchase price, he’d forward and additional $1,000 to the seller. If you are paying through the lender, you will still make tax payments along with your mortgage payment and end up ahead for the next year and if you are on TIPPs, you wouldn’t make another payment until January of the upcoming year. 

I am sure this is as clear as mud to everyone. I know it took me a few times to really understand it. I just wanted to be sure everyone was aware of what happens with property taxes when they buy a home. Remember that each City/municipality has a different due date for their yearly property taxes and some do not offer a TIPPs program such as Brandon. There are also some banks that will not allow you to pay your own taxes if you put only 5% down as they want to minimize their risk by collecting tax payments on your behalf to be sure that they are paid on time.

If you have any questions at all about property taxes, please don’t hesitate to give me a call.

Naomi 1

 Naomi Hamm, Mortgage Broker & Partner

 Office: (204) 727-2177

 Cell: (204) 724-7290

 Email: naomi_hamm@centum.ca

Financing An Acreage

Some people love the big city life but others long for a big beautiful home in the country. Financing country homes on numerous acres can be a little tricky so there are a few things you need to be aware of if this is your dream.

The first thing to look at is the zoning of the property. If you are looking to do a regular residential mortgage, the zoning must comply. If the property you are looking at is zoned agricultural, that is a whole other story. You’d then be looking to do an agricultural loan which I am not going to get into the requirements here.

The next thing to consider is the number of acres. If your dream home is sitting on land with less than 5 – 10 acres, it is a little bit easier. We will typically be able to qualify you in the same manner as a regular City home except with an acreage, an appraisal is almost always required. The minimum down payment is normally 5% of the purchase price with this scenario. The difference comes when your home is located on more than 10 acres and has a barn or a shop as well. The banks will only give value to a home, garage and up to the 10 acres.

Here is an example:

If you have an accepted offer of $200,000 on a home with 20 acres that has a large shop on it (5% down payment would be $10,000), the bank will do their appraisal on the house, garage and 10 acres only. If the value comes back at $190,000 (because they have not counted the additional 10 acres and the shop but of course the seller wants paid for those too), the bank will finance 95% of the $190,000. This means, they will give you a maximum mortgage of $180,500 which increases your down payment from $10,000 to $19,500. You are paying, out of pocket, for the additional 10 acres and the shop.

Another thing to keep in mind is if you have a well and septic tank, which is typical on an acreage, you will need to have a water potability test completed (your realtor will help with this). The bank needs to know the water is safe. In regards to the septic tank, there is usually no issue here unless it is new, in which case a septic certificate is required from the municipality in order to confirm it has been installed correctly.

Financing your dream home in the country can be done, there are just a few different requirements that you need to be aware of. Your realtor and your mortgage broker will work together to help make the process go smoothly. If you have any questions, please don’t hesitate to contact me!

 

Naomi 2Naomi Hamm, Mortgage Broker & Partner

 Office: (204) 727-2177

 Cell: (204) 724-7290

 Email: naomi_hamm@centum.ca

Not All Mortgage Penalties Are Equal

This is a story about Joe and Sue. Two different people with similar mortgages, but very different prepayment penalties. 

Joe and Sue each buy a house at the exact same time for the exact same price and get a mortgage for the exact same amount. The only difference is Joe uses a Big Bank, and Sue uses a monoline lender for their mortgages. Let’s assume they both received a rate of 2.99% for a 5 year fixed term. 

Three years into their mortgages, Joe and Sue are both going to be paying off their respective mortgages which are both at $250,000 at the time of the payoff. Now to keep the comparison fair, we will pretend that interest rates have not changed at all for any of the terms, whether it is the posted rates or the discounted rates. The rates are based on the actual interest rates at the time of writing. 

Now because they have ended their 5 year contract early, they will have to pay a penalty. Both agreed at the time they took out their mortgage they would pay the greater of 3 months interest or the Interest Rate Differential (IRD). The IRD is in place so that the lender will be reimbursed for any income they would lose because you broke the contract early. In theory it should only apply when rates have gone down from the rate you agreed to pay. In this example, they each agreed to pay 2.99% for 5 years, so if rates had dropped to 1.99% the lenders would be entitled to the 1% difference for the remaining two years. Which is fair. If you invested $1000, and were told at maturity your investment would be worth $1200, you would not want to get $50 and be told, “sorry, someone else changed their mind.” You, like everyone else, would want the full $200 you were promised. Same idea. Only the Banks are using the IRD to punish you for leaving, or to force you to stay with them. Which is not fair, nor the idea behind an IRD. 

In our example, Joe and Sue each have to pay a penalty. But how much they have to pay is a shocking difference! 

Sue’s Monoline Penalty: $1,868 

Joe’s Big Bank Penalty: $8,750 

That’s a difference of $6,882 !!! 

So why such a huge difference? In the simplest explanation, it’s the “discount” given by the big banks.

Let me explain. With a Monoline lender, like Sue used, that mortgage brokers usually use, they offer their best rates upfront. So they generally only have one rate for each term length. Where as the banks have Two rates for each term. The posted rate, and the discounted, or special offer rate. Almost everyone actually pays the discounted rate, but the banks use the posted rates when calculating the Interest Rate Differential. That is how they come up with huge IRD penalties. 

The math behind it can be a bit confusing when you read it, so pretend you’re back in high school math class…but pay attention this time. :)  

So the banks take the rate you are paying (2.99% in our example) subtract the difference between what is the current posted rate for a similar term for the time remaining (2 years at 3.04%) less the DISCOUNT GIVEN. So the posted rate in our example is 4.79% minus the real rate of 2.99% which is a discount of 1.80% That is what is going to cause the pain. So they take the similar posted term rate then minus the discount (3.04% – 1.80%). Then they multiple that number by the balance owing and the time remaining. 

Big Bank IRD calculation

2.99% – (3.04% – 1.80%) x $250,000 x 2 years = $8,750 

Compared to a true IRD calculation

(2.99% rate – 2.79% comparable rate for term remaining) x $250,000 x 2 years = $1,000 which is less than the 3 months interest, $1,868, which is what Sue would be paying. The Interest Rate Differential should not have come into play. 

The Numbers being used, based on rates at time of writing 

Posted Rate for 5 year term 4.79%
Rate Clients are paying for 5 year term 2.99%
Posted Rate for 2 year term 3.04%
Discounted Rate for a 2 year term 2.79%
   

 

To make up for such a monstrous penalty from his bank, Joe would have neede a rate of 1/2 of a percent (0.5% or 0.005) which is 2.49% lower than best rate at the time from the banks. There is more to consider with a mortgage than just rates. Know your other risks. 

At the time of writing penalties according to the Big 5 Banks online calculators and their listed posted rates: BMO $8750, Scotia $8250, RBC $9057.85, CIBC $10,677.65, TD Canada Trust online calculator not working but it would be $8750. The Banks penalties differ somewhat mainly because of differences in the banks posted rates.Mike B&W 

When shopping for a mortgage, be aware that rates are not the only thing you should consider. Although rates are obviously important, interest rates are only one of many factors to evaluate when deciding on your best mortgage. Contact Mike Trollope (204) 573-3938 or email mike@miketrollope.ca for a free consultation.

Understanding Why Mortgage Rates Are Dropping

The Bank of Canada announced a surprise quarter-percentage-point cut to its key interest rate Wednesday – a move it calls “insurance” against the potentially destructive effects of the oil price collapse. The reduction in the bank’s overnight rate to 0.75 per cent from 1 per cent – its first move since September, 2010 – comes as a precipitous drop in the price of crude slams Canada’s oil-dependent economy.

Speaking to reporters, Mr. Poloz said the oil price drop is “unambiguously bad” for the Canadian economy, prompting the bank to take out what he called an “insurance policy” against future risks, such as weak inflation and a household debt squeeze. But he denied the move was calculated to send the Canadian dollar lower.

“Market consequences will be what they are,” he said.

The rate cut sent the loonie plummeting below 81 cents (U.S.).

Mr. Poloz, who acknowledged that oil dominated the bank’s discussions leading up to Wednesday’s rate decision, said he’s ready to cut rates again if prices fall further.

“The world changes fast and if it changes again, we have room to take out more insurance,” he said.

The rate move, which few analysts anticipated, is an attempt by Mr. Poloz to shield highly indebted Canadian households from an oil-induced hit to their jobs and incomes – signs of which are already evident in Alberta.

The rate cut is a signal to private-sector banks to lower their own rates on mortgages and other loans.

Cheaper crude, while good for the U.S. and global economies, is unequivocally bad for Canada.

The bank warned that lower oil prices would take a sizeable bite out of economic growth in 2015, delay a return to full capacity and hurt business investment – a trend that has already triggered mass layoffs and production cuts in Alberta’s oil patch.

But the effects could spread further, threatening financial stability as a result of possible losses to jobs and incomes, according to the central bank.

“The oil price shock increases both downside risks to the inflation profile and financial stability risks,” the bank acknowledged in a press release. “The Bank’s policy action is intended to provide insurance against these risks.”

The bank’s new forecast assumes a price of “around” $60 per barrel for Brent crude, more than $10 above where it is now. But the central bank said prices “over the medium term are likely to be higher” than $60.

As recently as June, oil was selling for $110 a barrel.

The bank also lowered its bank rate and the deposit rate by a quarter percentage point Wednesday, to 1 per cent and ½ per cent, respectively. And it removed any indication of which way rates might go next.

The bank’s decision coincides with a much more pessimistic economic forecast than the bank issued just three months ago.

Following the lead of most private-sector forecasters, the bank slashed its GDP growth forecast to 2.1 per cent this year (from 2.4 per cent), before rebounding to 2.4 per cent in 2016. The worst effects of the oil collapse will be felt in the first half of this year, when the bank expects annualized growth of 1.5 per cent, nearly a full percentage point lower than its October forecast.

The Canadian economy grew at an estimated rate of 2.4 per cent in 2014.

The bank said the economy won’t return to full capacity until the end of 2016, several months later than its previous estimate of the second half of next year. Among other things, the central bank pointed to significant “labour market slack.”

Crude’s effects on the economy will be broad and profound, the bank warned. Investment in the oil and gas sector will decline by as much as 30 per cent this year, while lower returns on energy exports will eat into Canadian incomes, wealth and household spending.

The bank also hinted at a possible spread to other parts of the country of a real estate slump already under way in Alberta. “The extent to which the downturn already evident in Alberta will spill over into other regions remains to be seen,” the bank pointed out in its monetary policy report.

“The ramifications of the oil-price shock for household imbalances will depend importantly on the impact of the shock on income and employment,” the bank added.

The bank also expressed growing angst about the impact that oil could have on inflation, which it said has been propped up by temporary effects, such as the “pass-through” effect of the lower Canadian dollar.

Consumer price increases, now running at roughly 2 per cent a year, are “starting to reflect the fall in oil prices,” the bank said.

The bank’s new forecast calls for overall inflation to fall well below its 2-per-cent target this year, averaging just 0.6 per cent. Core inflation, which strips out volatile food and energy prices, is expected to average 1.9 per cent in 2015.

Source: Globe and Mail