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TD Canada Trust Having A Meltdown
Happy New Year! I've been doing some last minute financial house cleaning today including opening a Tax Free Savings Account for my wife and attempting to do a lump sum payment on our mortgage. Setting up the TFSA took probably a little bit longer than it normally would have probably because a lot of people have left it to the last minute like we did. We were able to get that account set up for her though and overall it only took about 30 minutes on the phone (for some reason opening the account online for her didn't work).
Trying to make a lump sum payment on our mortgage is a different story. First I wanted to just take a look at our accounts online so I entered my login information into the Easyweb login screen. I got a message saying that "Your request could not be processed, please try again. If the problem persists please call Easyline." I tried again and got the same problem. So I called the Easyline number and was cheerfully greeted with... a busy signal. Ok, so it seems like everyone is having this problem. Hang up. Redial. Busy. Hang up. Redial. Busy. Hang up... After about 5 minutes of back to back redialing I finally heard a phone ring instead of the busy signal and the automated system picked up and asked me to enter my card number and access code. I then navigate through a couple layers of menus to get to the selection that I think will allow me to make a lump sum payment. The automated voice tells me that I am being transferred to a credit specialist and the next thing I hear is a fast busy tone. Nice, Easyline just hung up on me.
I go through the whole redial-busy-hangup-redial exercise again and after a few minutes I get through again (I should note that every other time that I can remember every calling Easyline I get through with no problems at all on the first try) and I navigate through the menus again to get connected to a credit specialist. This time I get properly put into the call queue and after a couple more minutes waiting on the line I get a live person on the phone. I tell them that I would like to make a lump sum payment on my mortgage and he tells me that he can't help me with that right now because their systems are down.
Lovely. Easyweb (and WebBroker, the web access to TD Waterhouse) is down and Easyweb is referring people to Easyline. I didn't try any of the automated features of Easyline but my bet is that if a live person can't do anything because their systems are down the automated system won't be able to do anything either. I could have saved about half an hour of time if the Easyweb screen said that they are having technical difficulties impacting Easyweb and Easyline account access (and I wouldn't be surprised to hear that branch account access is down as well) that they are working on resolving.
Hopefully they can resolve these issues quickly. I wonder if the TSX and TD Canada Trust have some systems from the same vendor...
Anyway, Happy New Year and I wish all me readers a prosperous 2009!
Update(@ 14:40): Easyweb seems to be up and running now so they resolved whatever issues they were having fairly quickly.
The Other Rate Cut
At the end of October I took a look at the interest rates were on some high interest savings accounts
. It seems that the interest rates on these accounts have quietly dropped since the Bank of Canada dropped the overnight target rate by 0.75% on December 9. Let's take a look at the interest rates from the end of October compared to now.
First on the list is the PC Financial Interest Plus Savings account
. At the end of October it was paying a 3.05% interest rate for balances over $1000. Now that is down to 2.75%.
Next is ING Direct's Investement Savings Account
. At the end of October it was paying 3% with no minimum balance. That rate has dropped to 2.70% now.
Back at the end of October I also looked at HSBC Bank's Direct Savings Account
. It was paying 3% at the end of October with no minimum balance and it is paying 2.75% now but they seem to be offering a 1% bonus for new deposits.
I also took a look at ICICI Bank's HISAVE Savings Account
which was paying 3.4% with no minimum balance and it is paying 3.10% now on Canadian dollar deposits (and 2.5% on US dollar deposits).
An interesting thing that I found while looking around at mortgage options for that mortgage post earlier this week is that Scotiabank has what appears to be a new savings account called the Scotia Power Save account
. On balances of less than $5,000 this account pays no interest but on balances $5,000 and over it is currently paying 3%. So if you have more than $5,000 sitting in one of the other popular high interest savings accounts it looks like you can increase your interest payout by at least 0.25% by moving to this Scotiabank account (unless you are with ICICI bank). What would be very interesting is if Scotiabank offered a Tax Free Savings Account version of this account.
Taking Advantage of Lower Interest Rates
The recent interest rate cuts have put us in a bit of a strange situation. Back in 2005 we locked in a portion of our Home Equity Line of Credit (HELOC) at a 4.55% interest rate for 5 years. That interest rate looked really good through 2005, 2006 and 2007 but in early 2008 it started to just look good, not really good. Now with prime at 3.5% that interest rate doesn't look so good. We could save almost 25% of our mortgage interest costs by getting that 3.5% interest rate instead of the 4.55% we are paying. But we are locked into our 4.55% mortgage until mid-2010, how can we take advantage of these lower interest rates today?
We can take advantage of these lower interest rates by using the lump sum pre-payment option that is built into our mortgage. Most mortgages have two 'accelerated payment' options built into them (when you are shopping for a mortgage you should make sure the mortgages you are considering have both of these options or some variation of these options built in even if you don't think you will ever use them). The first option is the lump sum pre-payment option. This option generally allows you to pay down some specified percentage of your original mortgage amount on a yearly basis. The typical lump sum pre-payment limits are 10%-20%, so every year you can choose to put up to that amount of your original mortgage amount directly into your mortgage. The other option is the increased payment option. This option generally allows you to increase your monthly payments either by some fixed percentage every year or by a fixed percentage over the whole term of the mortgage. The yearly payment increase limits are typically 10%-20% and the payment increase limit over the term of the mortgage is up to 100%. So if you started with a $1500/month mortgage payment you could increase that by either between $150 and $300 every year or by up to $1500 over the whole term of the mortgage.
Ok, that's great we can put a lump sum into our mortgage or we can increase our payments, how does that help us take advantage of current lower interest rates? It isn't like we have a pile of cash laying around and even if we did that wouldn't let us take advantage of the lower interest rates (we would just be getting out of our higher interest rate, not using the lower interest rate). Well, we can take advantage of the lower interest rates by using the variable portion of our HELOC. Currently the interest rate on the HELOC is at prime which is 3.5%. The way our total HELOC works is we have a fixed portion with a 4.55% interest rate that works like a regular mortgage, we have fixed payments and every month a little less of that payment goes towards interest and a little more goes towards principle. We also have a variable portion of the HELOC that has a floating interest rate which right now is equal to prime (although the bank could change that if they wanted to). Every month we make a payment to our fixed portion of the HELOC the principle that we pay off that becomes available to us on the variable side of the HELOC. So say we had a $150,000 total HELOC and we had the full $150,000 fixed when we started. So our fixed mortgage is for $150,000 and we have $0 available in the variable portion of the HELOC. The first month we make a payment of say $1000 and say $600 of that is interest, $400 is principle (which is about a 15 year amortization, not the typical 25 year amortization). Then at the end of the first month the balance on our fixed portion would be $149,600 and we would have $400 of credit available in the variable portion of the HELOC. We don't pay anything for that $400 of available room in the variable portion of the HELOC, it is there for us to use if we want to (and we would have to pay interest on it if we did use it) but we don't have to do anything with it.
Now the picture might be starting to get a little more clear. We have been paying off the fixed portion of our HELOC for about three and a half years now. We also haven't been using the available room in the variable portion of our HELOC. We also chose a fairly short amortization of around 10 years when we set up the fixed portion of our HELOC so every month more than half of our mortgage payment is going to pay down principle and less than half is going towards interest (in fact I think that around 30% is going towards interest currently). So we are now in the position where we have about 30% of our original mortgage amount available on the variable portion of our HELOC which currently carries an interest rate of 3.5% and at the same time we have a portion of our HELOC fixed at 4.55% that has a lump sum pre-payment option. So what we can do is take a lump sum out of the variable portion of our HELOC and put it into the fixed portion of our HELOC and cut the interest rate on that lump some from 4.55% to 3.5%, a savings in the interest we pay of 23%. The only slight wrinkle is that we can only make lump sum payments of up to 15% of the original mortgage amount per calendar year. Lucky for us we are in the last three weeks of the calendar year so we could make one lump sum payment of 15% this month and another 15% lump sum payment next month.
There are actually two advantages to doing this. The first is that the interest paid on the money transferred from the variable portion of the HELOC has been reduced. The second is that since the payments on the fixed portion of the HELOC are fixed and the balance has been reduced there is less interest interest every month so more of the fixed payment is going towards principle instead of interest. Of course the downside is that the total payments that are made to the overall mortgage are higher because the interest on the variable portion of the HELOC has to be paid every month in addition to the regular payment made to the fixed mortgage. So even though from a net worth point of view making a lump sum payment from the variable portion to the fixed portion of the HELOC looks good, from a cash flow point of view it doesn't look as good. Every month the cash flowing into the total combined mortgage (fixed mortgage and interest payments on the HELOC) will be higher than before doing the lump sum transfer.
However, before we jump right in and do this mortgage pre-payment, we need to ask whether we even want to take advantage of these lower interest rates. There is some risk involved in attempting to do this. The 4.55% interest rate that we have on the fixed portion of our HELOC is fixed until the middle of 2010. So we have a year and a half left of a guaranteed rate of 4.55%. The current prime rate of 3.5% is only guaranteed for today. It could change tomorrow or next week or next month and it could change by a lot. There is no protection on where the prime rate could go or how fast it could move. So we have to ask ourselves, do we think that either the prime rate is going to stay below the 4.55% rate we have on our fixed mortgage between now and mid-2010 or do we think that we could pay off the portion of the HELOC we used to pre-pay the fixed mortgage if interest rates went over 4.55% in the next 18 months or so? It isn't an easy question to answer. The current economic, market, and interest rate environment is very volatile and has already shown us how quickly situations can change. A year ago I thought that the 4.55% interest rate we had on the fixed portion of our mortgage was pretty good because prime was at 5.75%. Where prime will be 12 months from now is anyone's guess. So making a lump sum payment in order to take advantage of a lower prime rate requires some careful consideration.
More Interest Rate Games
Yesterday the Bank of Canada lowered the target for the overnight rate by 75 basis points (0.75%) to the lowest level in 50 years. This was a little bit of a surprise move as only a 50 basis point move was expected. The Bank of Canada also said that the Canadian economy is now in a recession. The reason a central bank (like the Bank of Canada) lowers interest rates is so that borrowing money is cheaper (and saving money is less profitable) which makes it easier for businesses and individuals to spend money because either it costs less to borrow it or it isn't as attractive to save it. So what did the Canadian banks do? They lowered their prime interest rate by 50 basis points, holding back 0.25% of the Bank of Canada interest rate cut from consumers.
Let's take a quick look back over what has happened to interest rates during the last few months. On September 3 the Bank of Canada in its scheduled interest rate announcement kept the target overnight rate at 3%. At that time most Canadian banks had a prime rate of 4.75%. So the spread between the prime rate and the overnight rate was 1.75%. On October 8 in a move coordinated with central banks across the globe the Bank of Canada cut the target overnight rate by 0.50% to 2.5%. Canadian banks balked at this move and only lowered their prime rate by 0.25%. On October 10 the Canadian federal government announced that through the CMHC (Canadian Mortgage and Housing Corporation) they would be providing funding to insure $25 billion worth of mortgages, basically taking the banks off the hook for mortgages that may go bad. This prompted some interest rate moves by the Canadian banks, some of them lowering their prime rate by 0.25% and others lowering by 0.15%. Then on October 21 the Bank of Canada released a scheduled interest rate decision lowering the target overnight rate by 25 basis points to 2.25%. While the Canadian banks took their time announcing interest rate cuts by 6:00 on October 21 all the banks had lowered their prime interest rate to 4%, maintaining the 1.75% gap between the prime rate and the overnight rate target. Yesterday was the next Bank of Canada interest rate move and the banks have decided that they need a 2% spread between the target overnight rate and their prime rate, the prime rate is at 3.5% and the target overnight rate is now at 1.5%.
This 0.75% move by the Bank of Canada was slightly unexpected so I wonder if the banks were prepared to do a 0.5% cut at most, only counting on a 0.5% move by the Bank of Canada. The next scheduled interest rate announcement by the Bank of Canada is on January 20, 2009. It will be interesting to see what happens between now and then in the economy and how the Bank of Canada and the Canadian banks respond on January 20.