In a world of low interest rates, sensitivity to interest rate changes is high. Let’s talk about where interest rates are, how they are affecting us today and what that means for your portfolio. More importantly what does this mean for your retirement? We also get into maximizing your assets for retirement and legacy desires.


The number one question that I get from people looking to become clients is what will my retirement look like. Afterall, who cares about Wall Street when Main Street is what affects us day to day.


Anecdotally, I have had several people coming up for renewal on their mortgage and noticing increases in their mortgage payments as interest rates today are higher than when the originally got the mortgage. I expect interest rates to be stuck in a range for the next couple of years however they could be higher or lower. One point to note is what happens when you want to move your mortgage or make changes.


Some lenders will let you increase your mortgage and take a blended rate with the new amount. Others won’t and when you payout that mortgage there is either a 3 month interest penalty or an interest rate differential (IRD) penalty. If rates are lower today than they were when you got the mortgage for the IRD rate they use then you can pay a very handsome fee. Most banks take the posted rate at the time that you took out the mortgage, not the discounted rate that you actually pay.


Many lenders out there besides these banks are more flexible and terms and base the IRD off of your contracted rate versus today’s rate. This makes for a lighter penalty in many cases.


However, where are interest rates today? I take a global outlook on all financial matters.


Here are the 10 year bond rates for several countries:

  • US = 2.7%
  • UK = 1.2%
  • Germany = 0.16%
  • Germany 0-9 year are negative
  • Japan 0-10 year are negative


Canadian mortgage rates are driven off of the Canada 5 year bond trading around 1.83%. Desired profit ranges for lenders often sit between 1.50 to 1.70% currently they are around 1.97% and this suggests that if low interest rates persist then mortgage rates may drop. This isn’t a guarantee however it could happen.


Another factor is the debt levels of a country. Here’s a snapshot:


Debt to Income 2018:

  • Canada: 176.01%
  • US: 76.6%
  • Germany: 82.5%
  • Euro area: 94%
  • China: 50.3%


China is an emerging economy and is still penetrating much of their population it should not be used for comparison purposes but is interesting as a side note.


What is a better indicator is that of the US vs Canada. Notice that they are almost a 100 point difference and Canada has more than twice the debt levels. Prior to the credit crisis the US had around 148%. Canada currently stands at 176%


There is slowing in Canada but we are not seeing major stresses in the Canadian economic data yet.


One thing to remember though is that many of the lending programs that we’ve had are no longer available. Some borrowers who previously had a mortgage will be best off to renew that mortgage with their existing lender as some will likely not qualify under the programs available today. That also means that they do not have access to increased borrowing capacity.


This is reflected in our investment thesis that Canada is not the opportune country to be invested in. Instead we focus on the US with its hegemonic status, world class education systems, rule of law and enforcement, capacity to take on debt, domestic activity makes up roughly 70% of GDP, technology, large population and geographic protection. These qualities make it an ideal country to invest in. It also has a good consumer credit runway ahead of it. Corporate debt may be another issue.


We can utilize Canadian structured ETF’s to gain economic exposure so we don’t have to worry about foreign holdings. Further there are many options to hedge out the currency risk within those ETF’s. The cost of investing in the US is extremely cheap.


Germany is second on our ideal list of investment suitors however they are firmly on the downtrend at the moment with construction PMI being the bright spot.


Overall we are cautious on the markets even with the recent selloff. We think the December 24 selloff was not warranted and marked a bottom for the time being.


Most of the companies in the US S&P500 have beaten earnings and have been a source of strength in the markets in January.


Trade negotiations between the US and China have seemed to defrost a bit and Trump toned back his rhetoric on the wall in his State of the Union address. He will be looking to get involved to take credit for any deals that come out of this situation. Our guess is that everyone including Trump wants a deal and they will come to some sort of agreement as the longer these trade disputes drag on, the more everyone will feel the pain.


We are on the lower range of people’s equity exposure and are looking for brighter economic numbers before commiting more assets to equities.


If I haven’t lost you by now with boredom then I’d like to shift focus to insurance. Some people may find that they are concerned about conflicting goals. One being cash flow in retirement and the second being leaving a legacy.  Should you find the numbers to not work out to your liking then you can spend your assets and buy your legacy. Should you want to leave an estate to your children an insurance policy is an effective way to accomplish that while saving your assets for you.


Buying your estate and using your assets could be something that you consider and it never hurts to get a quote on a policy.


There are two questions that I ask every client and client-to-be.

  1. How much cash do you need (lump sum or stream)?
  2. When do you need it by.

This dominates all financial planning aspects and also the construction of the portfolios.


Have a question about retirement? We do free retirement consultations that help people better understand their retirement potential.


Until next time.


Trevor Dale, CFA


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