By Garry Marr, National Post March 4, 2013
The Bank of Montreal has dropped the rate on its mortgages, perhaps leading the charge into a rate war.
The spring housing market is expected to bring on a new battle from mortgage lenders as they compete for what has become a shrinking pie in the form of lower real estate sales.
Bank of Montreal struck first on Friday with a five-year closed mortgage rate of 2.99 per cent — down from 3.09 per cent and now the lowest published rate among the big banks — with sources indicating the financial institution’s mortgage specialists are armed with discretionary power to go as low as 2.89 per cent.
As the banks battle it out for consumers skittish about jumping into what more than one analyst sees as an inflated housing market, lenders know their costs have dropped in the past few weeks. The Bank of Canada’s five-year bond rate is in the 1.3 per cent range after being almost at 1.6 per cent at the end of January.
“Perhaps there is pressure to lower rates,” said Gregory Klump, chief economist with the Canadian Real Estate Association, about banks trying to capture customers in a slowing market. “It remains to be seen how much [the real estate market] is going to slow.”
While some predict a collapse in the housing market, so far prices have remained firm and sales have dipped only in the single-digit range from a year ago.
CREA said last month that January prices were up 2 per cent year-over-year, while sales were down 5.2 per cent during the same period. On a seasonally adjusted basis, sales actually climbed 1.3 per cent from December to January.
It’s unclear whether a new round of mortgage rate cuts will have an impact on consumers already used to a prime rate of 3 per cent and long-term mortgage rates even below that.
“I don’t think low rates change their mind on whether they are going to buy or not,” Mr. Klump said. “What it does change is how much property they can afford. The most important thing at this point in the cycle is how confident consumers are of economic prospects going forward.”
The Bank of Montreal may catch some headlines with its new rate, but mortgage brokers have been offering deals as low as 2.84 per cent on a five-year mortgage without any of the restrictions of the BMO mortgage. The rate on a 10-year mortgage is as low as 3.64 per cent, say industry sources.
“You can’t break the BMO mortgage and transfer to another lender,” said Rob McLister, editor of Canadian Mortgage Trends, adding a customer can make a prepayment for only 10 per cent of the value of the mortgage per year instead of the standard 20 per cent.
Mr. McLister said if the bond market continues to go down, he can see rates falling even below the 2.99 per cent threshold BMO establishing.
“They are going to try to keep rates as high as they can for as long as they can,” he said.
As bond rates have dropped, it is has allowed lenders who fund mortgage brokers to lower their rates, making them more competitive with the big banks.
The last time banks started cutting rates in a competitive battle, they drew the wrath of Finance Minister Jim Flaherty, who has repeatedly expressed concerns about the housing market getting overheated.
Mr. Flaherty has indicated he wants to avoid a crash and has brought in new restrictions — including limiting amortization lengths to 25 years today from as high as 40 years during the housing boom — to cool the market and ensure a soft landing.
“There is uneasiness at the federal level with banks competing on rates. [Ottawa is stepping in], but behind the scenes,” Mr. McLister said.
BMO warned that rates could be going up in the future, making locking in a priority. “There is always competition out there,” said Sameh Elrefaei, head of BMO’s home financing products. “The reason we are doing this now is essentially our customers have been telling us they like this product and they want the certainty of a lower payment and a better rate.”
Others banks appear poised for battle, with one industry source indicating customers can already get a six-month rate hold as low as 2.99 per cent from one major lender.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, said her financial institution is ready to be competitive.
“There is a lot of margin pressure, but the reality is there is a spring rally and the reality is customers are out there shopping,” Ms. Haque said.
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