Finance Minister Jim Flaherty has warned Canada's banks to stay away from mortgage wars, following the Bank of Montreal's decision to reintroduce a record low interest rate.
“My expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” Flaherty said in a statement to the Globe and Mail.
The Bank of Montreal says that, effective immediately, it will be offering a five-year fixed-rate mortgage of 2.99 per cent, the same deal it offered last spring, triggering a round of interest rate-cutting among mortgage lenders.
BMO's move comes amid reports of slower mortgage lending and a softening housing market.
Flaherty has warned against excessively low mortgage rates before, while the Bank of Canada has noted that household debt, which is largely driven by mortgages and has hit a record high in Canada, is the largest risk to Canada's economy.
The Canadian Press reports:
OTTAWA - Despite ongoing concerns about high levels of debt, interest rates in Canada are going nowhere except perhaps down, say analysts following the latest move by one major bank to shave fixed mortgage rates.
With bond yields trending south and the housing market slowing, the Bank of Montreal over the weekend dropped its posted five-year fixed mortgage rate by 0.10 points to 2.99 per cent in an effort to attract new borrowers.
Others may follow suit, although analysts note that many borrowers had been able to negotiate the new BMO posted rate, and in some cases even lower costs, for some time.
Finance Minister Jim Flaherty responded with a warning to banks not to engage in a "race to the bottom practices that led to a mortgage crisis in the United States."
But analysts said the banks are merely responding to the natural forces in the market given that the Bank of Canada appears rooted to keeping its trendsetting policy rate at one per cent for much longer than was anticipated a few months ago.
Interest rates are unlikely to feel any upward pressure any time soon, said CIBC chief economist Avery Shenfeld.
On Monday, CIBC World Markets extended its forecast for when the central bank would start hiking rates to the third quarter of 2014 — six months longer than it had previously anticipated.
Lower mortgage costs could revive what has been a slowing housing market, say analysts, but given that household debt is at record highs and income growth has been modest, the inducement may not be as effective as it might have been in previous years.
"Borrowing is slowing anyway, so I don't believe that a modest drop (will make much of a difference)," said Shenfeld. "A modest drop in five-year mortgage rates might induce more people to lock in rather than take a variable mortgage, but I doubt it will have a huge impact on the volume on borrowing."
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