Category: Canada

I extensively analyzed RESP’s in an earlier post, coming to the conclusion that a person is likely better to wait until the last moment that they are convinced their children will be heading to upper-level education before opening one.

The Globe and Mail is reporting how RESPs are having a rather lacking participation rate and goes into detail why this may be the case. I believe the explanation is simpler than this, and it boils down to two reasons:

1. People do not have disposable income to invest in an RESP, and are choosing to allocate it elsewhere for more immediate priorities;
2. Opening up an RESP leads to potential losses, and people would not want to lose money on their children’s education fund compared to their own investments – ergo, they will be sticking to extremely safe fixed-income products, and given the interest rates available, it is not really worth it at the moment.

There are plenty of scholarship funds out there that try to prey on people that fall under category #2; unfortunately for those that read the fine print, they will likely be throwing away their money on these conceived structured products that are designed to enrich the scholarship fund managers.

The government is trying to promote RESPs to lower income individuals by offering significant incentives to putting money in them. For example, if you earn less than $40,970 in a year, you will qualify for the Canada Learning Bond, which is a “free” $500 plus $100/year that your income is below that level into the RESP. If your income is less than $38,832/year, your contributions will be eligible for a 40% match by the government for the Canada Education Savings Grant, as opposed to the 30% or 20% brackets if you make more income.

Many lower income individuals are usually too busy working to pay attention to any of this and thus will not be taking advantage of money of these benefits. This is even assuming they are not falling under category #1, mainly that they do not have enough disposable income to be thinking about RESPs for their children.

The Bank of Canada, to nobody’s surprise, raised interest rates by 0.25% today. Key parts of their statement:

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank’s view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

…

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

The take-home message is that growth projections have moderated to a “business as usual” type of economy after the 2008 calamity and the Bank of Canada is reserving all rights to not committing themselves to future rate increases. It is likely the global situation, rather than the domestic situation, will have significant influence over the decision to continue to raising rates.

As of today, the target rate is 0.75%, and I expect a rate of 1.00% by years’ end.

The only implication of this decision is that short-term corporate paper and inter-bank lending rates will correspondingly increase. People with variable rate mortgages will see interest increases, but this will not be affecting the longer-term fixed rate mortgage rates. The other subtle implication for most people is that financial institutions such as ING Direct might be willing to offer better rates on short-term savings and/or short-term GICs.