03/10/2013 08:44 EDT | Updated 03/11/2013 08:32 EDT

Mortgage War: Rates Below 3% Pop Up As Lenders Ignore Flaherty's Warning


Finance Minister Jim Flaherty thanked Canada's banks on Friday for not lowering mortgage rates to match BMO's recently announced rock-bottom offer.

The minister had warned Canada’s lenders last week against launching a new mortgage war, after BMO brought back its 2.99 per cent rate for a five-year fixed term mortgage.

But it seems mortgage lenders (and even the big banks themselves) aren’t actually listening to Flaherty, as a growing number of brokers are dropping their rates to below even that of BMO.

And while that may be good for prospective home-buyers, it could prove in the long term to be bad news for Canada’s economy. With household debt already at sky-high record rates, further increases in mortgage debt could prove unsustainable.

In just the past several days, the number of lenders offering rates below three per cent, as advertised on the RateHub website, has just about doubled.

None of those lenders are the major banks; of them, only TD Bank has come close to matching BMO’s rate with a 3.19 per cent offer for a five-year fixed mortgage.

But what banks officially advertise and what they offer you when you walk through the door can be two different things.

Most banks aren’t advertising 2.99 per cent, but I know if you walk into any branch in the city [of Toronto] right now they’ll start off with 2.99 per cent as the starting rate,” mortgage broker Christopher Molder told The Globe and Mail.

In a sense, the previous mortgage war -- started in early 2012 by BMO -- never really ended.

Such rock-bottom rates are becoming commonplace,” the RateSupermarket blog reports. “With a buyer pool shrunk by CMHC mortgage rule changes, and softening sales nationwide, lenders have been playing the ‘how low can you go?’ game for some time now.”

RateSupermarket notes that Butler Mortgages is offering a 2.77 per cent mortgage in Ontario, and "broker-offered rates below 2.8 per cent have become the norm."

It’s precisely the “how low can you go” game that Flaherty warned financial institutions against last week.

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, as quoted at The Globe and Mail.

That's a pretty clear indication that Flaherty is worried Canada could be following the U.S. down the path of irresponsible lending.

At the heart of the problem are two interrelated issues: Household debt and overpriced housing.

Fitch Ratings Agency recently estimated that Canada’s housing market is overvalued by 20 per cent. That’s somewhere in between TD Bank's estimate of a 10-per-cent overvaluation in the market, and Capital Economics’ estimate that housing costs are 25 per cent above fair value.

The falling mortgage rates ... threaten to undo Flaherty’s controversial efforts last summer to gradually let the hot air out of the housing market by tightening rules for government-backed mortgages,” Chris Sorensen wrote at Maclean's.

With rock-bottom mortgage rates, house prices could now push even higher, which in turn could set the housing market up for an even bigger correction if and when the time comes.

And with household debt at a record 164 per cent of household income, Canadians on the whole have little room to take on more.

At these house price levels, even a small increase in interest rates could sink many homeowners.

According to a survey carried out in the fall of 2011 for the Canadian Association of Accredited Mortgage Professionals, a one-per-cent interest rate hike could make mortgage payments unaffordable for 11 per cent of mortgage holders. A two-per-cent hike could sink 21 per cent of mortgage holders.

But that's a warning bell to which many in the industry simply aren't listening.

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