Canadians worried about mortgage rate hikes

As concerns over the state of the Canadian real estate market abound, a new survey says nearly half of Canadians are unsure about their ability to afford their homes if rates rise by as little as two percentage points.

The survey commissioned by the Bank of Montreal study finds 43 per cent believe an interest hike would either hamper their ability to pay or leave them on unsure footing.

Regionally, residents of Alberta were the least concerned, with 73 per cent saying that rising rates would not affect their ability to afford their homes, while residents of British Columbia were the most concerned. Just 48 per cent B.C. residents are comfortable in their ability to handle higher rates.

The survey results come as banks and economists warn about the rising debt levels of Canadian households.

It also comes as some of Canada's biggest banks have started raising variable mortgage rates, even though the Bank of Canada's overnight interest rate remains unchanged.

Earlier this week, both RBC and TD raised the posted rates on five-year mortgages.

That could signal the end of the era of cheap borrowing that has encouraged many Canadians to take on houses they may not have been able to otherwise afford.

BMO anticipates that the Bank of Canada will begin increasing interest rates from the current one per cent next year.

Many in the mortgage industry have recently advised homeowners to take on the previously less-popular variable mortgage rates as interest rates had remained low since the end of the recession, when the Bank of Canada pushed its overnight rate down to an emergency low 0.25 per cent.

But looking ahead, some industry watchers say now is the time to consider switching to lock in longer term rates with shortened amortization periods.

"Our interest rate outlook now projects that fixed mortgage rates will trump variable. While the decision ultimately depends on the individual, the low rate combined with a shorter 25-year amortization will significantly strengthen household financial stability," said Doug Porter, deputy chief economist at BMO Capital Markets.

In a report issued last week, Porter and colleague Benjamin Reitzes argued that with the U.S. recovery gathering steam, central bankers on both sides of the border are becoming more comfortable with the economy and less so with historically depressed interest rates.

Already, financial markets have priced in a near 50 per cent chance that Bank of Canada governor Mark Carney will start hiking his one per cent policy setting before the year's end, they noted.

Both Finance Minister Jim Flaherty and Carney have recently flagged the danger to the economy of Canadians becoming increasingly indebted, mostly through taking advantage of low rates to buy homes or take out home equity loans. Household debt to disposable annual income is above 150 per cent and likely to rise further toward the 160 per cent level that preceded the housing collapse in the U.S., say analysts.

With files from The Canadian Press

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BCE hikes dividend 5%

Three-month stock chart for BCE Inc. The company raised its dividend Thursday. CBC

BCE Inc. is raising its dividend by five per cent and using surplus cash to bolster its balance sheet as the telecom giant predicts strong growth ahead.

The Montreal-based telecommunications company and parent company of Bell Canada, said Thursday it will boost its annual dividend by five per cent to $2.17 per share for 2012. It's the seventh increase in the past three years, and payouts will begin in BCE's first-quarter payout, on April 15 next year.

"This reflects our confidence in delivering on our business plan, based on the Bell team's strong execution of our strategic imperatives and reinforced by a healthy balance sheet with ample liquidity," president and CEO George Cope said in a statement.

"We have the financial flexibility to reward shareholders, while supporting significant ongoing capital investment in Bell's broadband networks and services."

In addition to the dividend hike, the company will also buy back as much as $250 million worth of its own stock in a move designed to increase its share price and it plans to make a voluntary $750 million voluntary payment on its defined benefit pension plan.

Because it is tax deductible, the pension payment will provide BCE with about a $170-million boost to its free cash flow. It will also add an estimated three cents to adjusted earnings per share next year as it reduces expenses booked against earnings.

"The new share buyback program and voluntary pension contribution represent a well-balanced use of surplus cash," said chief financial officer Siim Vanaselja.

"In a financial climate of declining interest rates and weak equity returns, accelerating the cash funding of Bell's future pension obligation to preserve a strong solvency position in the pension plan is a prudent action."

BCE said Bell Canada's expected revenue growth will remain unchanged from prior guidance at between nine and 11 per cent, while the parent company's adjusted earnings per share should rise to a range between $3.10 and $3.15 from earlier guidance of $2.95 to $3.05.

UBS analyst Phillip Huang said BCE is continuing its "annual tradition" of raising its dividend.

"We believe the dividend increase and special pension contribution announcements are largely expected, but the buyback is a positive surprise," Huang wrote in a research note.

Huang called the special pension contribution financially attractive for BCE.

"Obviously, the voluntary funding will also reduce future pension funding and expense in the longer term."

But he said he considers the increased dividend of $2.17 at the low end of BCE's payout policy.

Huang said he expects earnings per share in fiscal 2012 to remain unchanged at his estimate of $3.25.

BCE is Canada's largest communications company, and a longtime staple in investment portfolios designed to profit from steady growth companies with a solidly dependable dividend. Aside from wireless and landline telephone services, broadband Internet and satellite TV, it also owns a stable of media properties including the CTV television network.

Shares in BCE were up 25 cents to $40.43 in morning trading on the Toronto Stock Exchange.

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