How Interest Rates Affect Consumers, Investors and Businesses

Interest rates, consumers, investors, and governments

First Published: ADawnJournal.com April 14, 2010

The interest rate of a country is extremely important to the economy. The changing of the interest rate can have a great number of effects on how the economy performs, as well as on the people who benefit or are hurt by the economy.

Consumers

When the Federal government cuts the prime interest rate, it affects consumers as follows:

·   If the government cuts the interest rate, it can lower the cost of getting a mortgage for a consumer. This depends on whether or not the consumer has a fixed or variable interest rate mortgage though. If someone has a variable interest rate, their mortgage payments will go down as the interest rate goes down.

·   The lowering of an interest rate will also help credit card owners. If the rate goes up on a variable interest rate, the credit card owner pays more, while the opposite is true if the interest rate goes down.

·   While cutting an interest rate saves money on mortgages, it hurts a consumer’s savings. Less interest means less money in the bank. When the interest rate goes up, consumers get more out of their savings.

Investors

The changing interest rate will affect investors and make them change their investing habits. Some examples of this with a rising interest rate include:

·   When the interest rate goes up, credit card companies, financial companies, consumer staples and service companies that do not use a lot of debt will be good companies to invest in.

·   Conversely, when the interest rate is up, mortgage lenders, real estate developers and automakers are companies to avoid for investments.

Companies that benefit from high interest rates will typically suffer when the interest rate is slow. Conversely, companies that suffer when interest rates are high will benefit when the interest rate is low.

Businesses

Businesses around the country are significantly affected by changing interest rates. When the interest rate changes, it has an effect on how much, or how little, a company borrows. When there is a shortfall in payroll, or there is a need to buy equipment, a company will often take a short-term loan. If interest rates are high, it will cost the company more to pay back that loan, which can affect the profitability of that business. When interest rates are low, companies can borrow more and not be as hard pressed to pay back the interest.

Business strategy is also affected by interest rates. Since businesses are all about profit, knowing what the interest rate will be on loans is very important. If a company is implementing a new program that will bring in a profit of five percent per year, but interest rates are seven percent per year, then the company should put their money into the bank rather than investing it.

Interest rates are very important for consumers, investors and businesses. When they go up, some areas benefit while others suffer. When the interest rate goes down, other areas benefit while those that benefit on high interest rates suffer.

Foreign Property Mortgages for Canadians

International/Overseas Mortgages for Canadians

First Published: ADawnJournal.com April 22, 2010

Recently released figures suggest that Canadian households have in the past five years increasingly sought to buy properties abroad to add to their own property in Canada. Whether these properties are used for holiday purposes, as a retirement nest-egg or bolt-hole, or merely as an investment, there is a clear benefit to those who can afford it from buying a foreign property for their own reasons. In many countries, it is possible to pick up a bargain – some places will even offer up a number of properties that an assiduous saver could arguably pay for up front in cash. Between this and the comparatively inflated “First World” property markets, however, there are many places where a property can be picked up for a good price, but will still require some borrowing for a purchase to be made.

Getting a mortgage to buy a property abroad is not as straightforward, generally, as finding one to pay for a domestic property. Clearly, it is more so than it used to be – Canadians who wanted to buy foreign properties used to have to find a way around the mortgage question if they wanted to avoid paying large premiums on top of the principal. The evolution of the global mortgage market has reached a point where it is now more than possible to find the right mortgage. Due to financing guidelines it is tricky to get a mortgage in one country for the purposes of buying property in another, so this development has made a big difference for people looking to get into the international property market.

If possible you should always try to get a mortgage in the same country as the property you intend to buy. It may cause a little bit more difficulty up front, especially if there is any kind of language barrier, and if there is such a barrier it is worth getting all documents legally translated as an extra cover for you. However, being able to deal with the bank face-to-face when you are at the property and carrying out any deals connected to it will be to your advantage. As a foreign buyer you will need to provide stronger guarantees to demonstrate your commitment to the property. You may need to put up a larger deposit than a national of the country where you are buying the house or condo, but bear in mind that you are buying a piece of real estate that could cost several times more in your home country and it will not seem as big an issue.

As banking has become more and more internationalized, it may well be possible – and beneficial – to source a deal in your home country to take out a mortgage in the foreign location. Most banks will have a presence or a sister bank in other countries, and if not they will at least have some level of collaboration with banks in those countries. This can make the whole process move a lot more smoothly, and can see you secure a good-value mortgage for an excellently-priced property.

Monetary Policy and Fiscal Policy

What is the difference between monetary and fiscal policy?

First Published: ADawnJournal.com April 29, 2010

Two of the most important parts of any country’s economics are their monetary and fiscal policies. Many people assume that these two policies are one and the same, but this is not the case. These policies are two different entities that affect a country’s economics in different ways.

Monetary Policy

The monetary policy of a country is the process by which a government or central bank supply money to the populace, thereby affecting the availability of money as well as the cost of money and the interest rate associated with it. This is done to reach a certain set of objectives to help the economy grow, as well as remain stable in difficult financial times. Economists will also refer to monetary policy as being the expansionary or contractionary policy of the country. When it is referred to as the expansionary policy, is when the total money supply of the economy is increasing, while contractionary policy is the opposite, where money is decreasing. These two policies within the monetary policy are also used at different times. When there is a recession, interest rates are lowered to combat unemployment through the expansionary policy. However, if the economy is suffering from high inflation, then interest rates are raised through a contractionary policy.

Interest rates are highly important to the monetary policy of the country and there is a distinct relationship between monetary policy and interest rates. Through the monetary policy, the interest rates of the country are tied in with how much money is supplied and how much is being borrowed. Through this relationship, it is possible to influence the inflation, economic growth, exchange rates and even unemployment of the country.

Nearly all industrialized and developed nations operate their monetary policy through specially created institutions. Examples of these institutions include the European Central Bank for the EU, the Reserve Bank of India, The Federal Reserve System of the United States, the Bank of Canada, the Bank of Japan, the Reserve Bank of Australia and the Bank of England. These institutions are called central banks and they have the distinct task of ensuring the financial system of the country is operating properly.

The most often used tool of monetary policy is open market operations. With this the government can manage the money supply of the country by buying and selling treasury bills, foreign currencies and company bonds. Other tools used by central banks to manage monetary policy include discount window lending, fractional deposit lending, moral suasion and open mouth operations.

Without central banks and a monetary policy, the economy of a country would be highly unpredictable. There would be no way to manage money and recessions could easily turn into depressions and inflation could run out of control. Examples of countries with poor monetary policies include Zimbabwe, which has seen its inflation rate reach unprecedented levels. Whenever a country hits a rough patch, or needs to do some work to keep its economy moving forward, the citizens should be happy they have a good monetary policy in place.

Fiscal Policy

Fiscal policy is not monetary policy, and it is important to make this distinction. A fiscal policy is the use of government expenses and revenue collection in order to influence the economy. This differs from monetary policy, which is used to stabilize an economy through interest rates and money supply.

Fiscal policy uses expenditures of the government and taxes in order to influence the economy. Through the changing of the level of taxation, it is possible for the government to improve the demand and level of economic activity, while also allocating resources and ensuring that income is distributed properly. As a result, the fiscal policy of a country can refer to the effect of the outcome of a budget on the activity of the economy. With fiscal policy, there are three different methods that can be used; neutral, expansionary and contractionary.

With a neutral stance, the budget is balanced, where the spending of the government is equal to the tax revenue that comes in. Therefore, the government gets all the money it needs from taxes and the budget outcome has no effect on the economy activity level of the country.

With an expansionary stance, government spending is greater than the tax revenue coming in. This is done by either lowering the taxes of the country, or by increasing the expenditures of the country while leaving taxation the same. This creates a budget deficit in most cases.

With a contractionary fiscal policy, taxation is greater than government spending. This is done through increasing taxation and leaving spending the same, or by reducing spending. This leads to a surplus for the government in most cases.

There are several ways that a fiscal policy will be funded, not including the largest way which is through taxation. These methods include:

1.   Seigniorage, which is printing money.

2.   Borrowing money from the population.

3.   Using fiscal reserves.

4.   Selling assets like land.

When a deficit needs to be funded through fiscal policy, it is usually done through the issuing of bonds, bills and securities. Since these pay interest, the government is able to collect money on them for a fixed period of time. However, when the government is borrowing money and cannot afford the fiscal payments, it will go into default on its foreign loans.

A fiscal surplus can be saved for future use, in which case it is usually invested in currency or other financial investments until it is needed. When there is an economic slump and taxation as well as income falls, these reserves can then be used to continue funding expenditures at the same rate as before, without having to worry about taking on more debt.

The fiscal policy is very important and has been used several times in the past to help countries get out of recessions, while also helping countries continue operating at pre-recession expenditure levels. Fiscal policies, combined with monetary policies, keep a country’s economy moving forward and benefit everyone in the long run.

Is A Dawn Journal The Best Personal Finance Blog?

Is A Dawn Journal The Top Personal Finance Blog?

First Published: ADawnJournal.com May 4, 2010

Is it possible to rank a personal finance blog or website “The Best” based on its traffic or content? I don’t know how many personal finance blogs exist today on the Internet; however, I do know that there are roughly 130 million blogs live these days and this number will only grow in the future. Among the total number of blogs, even if only a few percentages are personal finance blogs, that makes the total number of financial blogs a significant big number. And claiming one particular blog, such as A Dawn Journal to be “The Best Personal Finance Blog or Website” or “The Top Personal Finance Blog or website” would be preposterous. However, I would not hesitate to claim A Dawn Journal to be a very “different kind of personal finance blog or website” and I can claim that with confidence.

Here are some facts that make ADJ fairly distinguishable from its peers, different from any other financial blogs. Let’s go over some of these facts:

o You will come across many personal finance blogs these days; however, you will hardly come across situations in which the authors of these blogs have both education and work- related financial background. I come from both an educational and work-related strong financial background. My extensive education, training and experience have enabled me to develop the knowledge and skills required to write this and many other blogs.

o Most other financial sites have something in common – they are for professional investors; hardly will you find a personal finance blog which is easy to absorb and written in clear and simple English for regular and simple readers who are trying to enhance personal finance knowledge to build a secure financial future – just like you.

o Repetition of subjects is what you will find in many other personal finance blogs. How many times you can read articles in same subjects over and over? Do you really want to hold an MBA on TFSA account, discount brokerage ratings, ins and outs of smith maneuvering, how to do wash trading in your brokerage account and so on?

o I try to balance articles on ADJ on a variety of topics ranging across a wide array of subjects. You will come across articles from different viewpoints and every walk of life. The reason I do this? I would like to keep you informed and entertained without boring you and keeping things simple.

o I am one of the few financial bloggers who is also a Financial Author, an Internet Entrepreneur, and a full time Analyst at a Canadian Wealth Management Corp. trying to achieve my goal of living a Dot Com Lifestyle. My interest varies on a broad range of topics from International Real Estate to Green Living. I own lots of domains and many websites. At the end of this post, I will give you a list of my sites for which I write and update manually by myself.

After considering all the facts I presented above, it is up to you to see A Dawn Journal as the best or top personal finance blog or website, a different financial blog, or the worst personal finance blog ever. Regardless of what you think of ADJ, I appreciate your time for reading A Dawn Journal and hope to see you again.

How To Manage A Mortgage

Managing A Mortgage To Your Advantage

If you are looking for a worthwhile mortgage in today’s market, it is advisable to be ready for some difficult years ahead, as the real estate market searches for stability in the wake of two years of severe turmoil. Mortgage management is more important now than it has ever been before, as there is a tendency among banks to become very nervous and panicky when customers exhibit any sign of the feckless borrowing habits that played such a large part in triggering the current global financial crisis. It is not necessarily more likely that you will be the victim of a repossession – banks are still reluctant to do this where there is any other option – but it will affect what kind of deal you can get, if you happen to be caught up in a situation where you are unable to pay.

Mortgage management begins right at the start of the mortgage period, when you first apply for the loan. The first part of a good process of mortgage management is to tell the truth on your application. There are some situations where it is possible to successfully apply for a mortgage by lying on your application and qualifying for preferential rates. Depending on the level of due diligence carried out by the lending bank, you may get away with it. If you do, however, it is important to remember that mortgage loans are frequently renegotiated, and that any information you give on your application can be checked at the source. If you lied on your initial application it is an option for the bank to sue you.

Another reason why it is simply common sense to tell the truth on your application is that although the lie may give you a preferential rate, you may still find it difficult to make the monthly payments on a big loan. If you struggle with these payments, you may be asked to provide evidence for why this has happened, and if you expose the lie at that point you are again liable to be sued.

By far and away the main aspects of sound mortgage management come, though, when you have been awarded the mortgage and are paying monthly to the account. Budgeting plays a huge part in mortgage management, and making sure that the first deduction you make from any month’s pay check is your mortgage payment should mean that you can prioritize your financial commitments – of which keeping a roof over your head must be considered the most important.

If you ever fall into financial difficulties that make the monthly payments to your mortgage difficult to maintain, it is essential that you discuss the matter with your mortgage lender. Early reporting of any problems makes for a much better chance of solving them than late reporting.

Finally, and quite literally so, if you find yourself in with a chance of paying off your mortgage in full you should take into account what the most economic way of doing this will be. Some lenders charge a surcharge for early payment, although this can be on a sliding scale and may also be negotiable. Check your terms and conditions, and discuss matters with your lender.