05/09/2018 11:06 EDT | Updated 05/09/2018 17:18 EDT

Mortgage Rate War? BMO Offers What Is Possibly The Largest-Ever Discount On A Home Loan

But the “stress test” you need to qualify for a mortgage is about to get tougher.

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Bank of Montreal signage outside a branch in Vancouver, B.C., Fri. Aug. 25 2017. The bank has cut its rate for five-year variable mortgages to 2.45 per cent.
  • BMO's 2.45-per-cent variable-rate mortgage may be deepest discount a Canadian bank has ever offered
  • Bank of Canada hikes posted mortgage rate to 5.34 per cent, making "stress tests" more difficult
  • Home buying power effectively reduced by 2 per cent: Ratehub

Canada's major lenders have been hiking the rates on popular fixed-rate mortgages recently, but some are going in the other direction on variable-rate mortgages. None more so than the Bank of Montreal, which appears to be declaring war on the competition.

The bank is promoting a variable-rate, five-year mortgage at 2.45 per cent, a full percentage point below its own benchmark rate. It's the largest "big-bank variable discount we've ever seen," mortgage site reported this week.

"BMO's move is a counter-attack on HSBC, which has dominated the uninsured variable-rate market for two months with its prime-minus-0.96 per cent (2.49 per cent) special," RateSpy says. "Prior to this, no Canadian bank has openly gone head to head with the multinational giant."

Watch: The best places in Canada to buy real estate, according to MoneySense

A BMO spokesperson said in an emailed statement that the rate is "reflective of the competitive environment and is a great rate for customers seeking a variable mortgage. ... Customers that choose this product can also renew to a fixed rate mortgage with the same or longer term at any time with no fees.''

However, noted that the offer is not available for current BMO mortgage borrowers, only to new customers.

And it's a variable-rate mortgage, meaning the interest rate on it changes with overall interest rates. If rates were to spike, it could add significantly to the cost of your mortgage.

It comes at a time when the major lenders are raising rates on their fixed-rate mortgages. Even BMO itself hiked its posted rate for fixed-rate mortgages slightly last week, to 5.19 per cent.

The big banks' benchmark rates for fixed-rate mortgages — the most popular kind in Canada — now range between 5.19 per cent and 5.59 per cent, but the discount rates they offer most customers are still in the 3- to 3.5-per-cent range.

Their move will make it more difficult for many would-be buyers to qualify for a mortgage under the new rules put in place by Canada's banking regulator, OSFI, at the start of the year.

Buyers now have to pass a "stress test" to ensure they can afford higher rates. And that stress test is based partly on the Bank of Canada's posted mortgage rate, which in turn is based on the lenders' own posted rates.

And sure enough, on Wednesday the Bank of Canada hiked its posted rate to 5.34 per cent, from 5.14 per cent. As recently as a year ago, it was at 4.64 per cent.

According to calculations from mortgage comparison site Ratehub, this will reduce the maximum amount of mortgage a borrower can qualify for by about 2 per cent.

"This increase will put pressure on first-time homebuyers, who are the most financially strained Canadians entering the housing market," said James Laird, co-founder of Ratehub, in a statement.

"On the margin, every time (the rate) goes up, you're excluding more people from being able to get mortgages, all else equal," said Cormark Securities analyst Meny Grauman. "But people have different strategies to bring themselves on side.''

Earlier on HuffPost Canada:

Homebuyers with less than a 20 per cent down payment seeking an insured mortgage must qualify at the central bank's benchmark five-year mortgage rate.

And as of Jan. 1, buyers who don't need mortgage insurance must prove they can make payments at a qualifying rate of the greater of two percentage points higher than the contractual mortgage rate or the central bank's five-year benchmark rate.

Nearly half of all existing mortgages in Canada will need to be renewed this year, according to a CIBC Capital Markets report released earlier this month.

The mortgage rate increases from Canada's biggest lenders come as government bond yields rise, signalling higher borrowing costs for corporations. The yield on the Government of Canada benchmark five-year bond was 2.14 per cent on Monday, compared to 1.01 per cent roughly one year ago.

Grauman said there are a number of factors which are driving these increases, including higher funding costs.

"There's that element which motivates the banks to raise the rates at which they charge their clients,'' he said. "But you also have competitive dynamics as well that are at play.''
The rate for five-year, fixed-rate mortgages in Canada has been creeping up for more than a year, according to this chart from

Other lenders have reduced their rates for variable mortgages as well, though not nearly to the extent of BMO.

RBC late last month said it will reduce its offered rate for a five-year variable closed mortgage to 3.3 per cent from 3.45 per cent.

TD Bank last month cut its five-year variable closed rate offering for new and renewed mortgages earlier this month to 2.85 per cent which is 75 basis points less than its prime rate. Previously it was 2.95 per cent.

The banks are essentially cutting into their own profit margins, said Rob McLister, founder of

"In short, banks are accepting less profit as competition gets more aggressive for the fewer and smaller prime mortgages that now exist.''

— HuffPost Canada with files from Armina Ligaya, The Canadian Press

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