Canada's Condominium Magazine

BMO’s cut-rate mortgage shows lack of worry about housing market

Is it a coincidence that the Bank of Montreal cut its five-year fixed mortgage rate back to the same level—2.99 per cent—that earned it a rebuke from the then-Minister of Finance, Jim Flaherty, just a week after that minister stepped down? It is, according to BMO. The bank cut the mortgage rate because bond yields have fallen and the busy spring real estate market is underway. A bank has to stay competitive. BMO is the first of the big banks to offer this rate on a five-year fixed mortgage.

Jim Flaherty’s successor, Joe Oliver, didn’t seem overly bothered by the bank’s move. He said today that he would continue to monitor the market closely, but would not get involved any further. According to reports, Oliver told the head of BMO that the government is “reducing its involvement” in the mortgage market. The bank’s decision, Oliver said, is a private one, and he would not intervene.

Other banks are already offering even lower rates: TD Bank has a four-year fixed rate at 2.97 per cent, while Scotiabank offers the same at 2.94 per cent. But BMO now offers the lowest five-year mortgage of any of the major banks. It is possible, however, to find lower five-year rates. RateSupermarket.ca lists a five-year fixed at 2.94 from Butler Mortgage.

What many observers of the mortgage and housing market are concerned about is that the eventual, inevitable rise in interest rates will create affordability difficulties for home owners who are mortgaged to the maximum. If home values were to decrease, while interest rates went the other way, some home owners could be in trouble. As of today, however, most reports say that Canada’s housing market is stable and balanced and prices are expected to grow only modestly in the coming year. Further, a rise in mortgage rates would not immediately affect the majority of current mortgage holders, many of whom could go several years before renewing at a higher rate . Only new home buyers would be affected in the immediate term.

As for the current market, the Canadian Real Estate Association (CREA) recently called for a 1.3 per cent rise in home sales this year. The housing market is “entirely depending” on the continuation of low interest rates, according to CREA economist Gregory Klump, as the average price of a home in Canada is forecast to rise to $397,000 this year.

Prospective home buyers have something else to look forward to. As of May 1, the cost of mortgage default insurance will rise. Canada Mortgage and Housing Corporation announced in February that premiums on mortgage default insurance would rise between 10 and 40 basis points. A borrower with just 5 per cent down payment on a home will pay a premium of 3.35 per cent as of May 1, up from the current 2.90 per cent.

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