WATCH: Finance Minister Joe Oliver will be watching how the housing market reacts to the Bank of Montreal’s move
Rock bottom mortgage rates are back at major lenders, with BMO being the first among the country’s big banks to move its main 5-year fixed rate on new home loans below 3 per cent – the same move that one year ago prompted former Finance Minister Jim Flaherty to warn the banks about “responsible lending” practices.
With Flaherty out as finance minister and the crucial spring selling season upon the real estate market, BMO is looking to lock in as many home loans as it can.
Market experts suggest that with home prices already elevated in many markets and the pool of potential buyers shrinking by the day, this could be lenders’ last big grab for new customers ahead of a slower period.
Still, there’s concern among some the move borders on reckless given the exuberance witnessed in the housing market of late, where prices have climbed sharply. Loading up consumers who are already saddled with record debt loads with even more may not be a wise idea.
Here’s four things know about BMO’s rate cut and its impact on the housing market
What is the new rate?
BMO has cut its 5-year fixed rate — by far the most popular mortgage term – to 2.99 per cent, a 50 basis point cut from the 3.49 per cent it had been offering. The move follows similar cuts made at competing banks like TD and Scotia in recent weeks. But BMO’s cut is the first among the banks to bring rates back below 3 per cent in the most popular mortgage product.
Why are mortgage rates in focus at the moment?
Borrowing rates are garnering a lot of attention right now because there’s much uncertainty about everything from the housing market to how much debt Canadians can handle.
With consumers and households carrying the record debt loads, a movement up in rates would stress consumers’ ability to pay back loans and make mortgage payments. A downward move in home loan rates, however, will see more borrowed money plowed into the housing market, which TD says is already overvalued by as much as 10 per cent.
READ MORE: Is Canada’s record borrowing boom coming to an end?
Even before BMO’s rate cut, which was made late Wednesday, big banks and other lenders had been lowering mortgage rates in recent months as homes sales have slowed and competition for fewer borrowers has picked up. Lenders have been able to offer lower rates because their own borrowing costs on debt they use to fund mortgages remain extremely low (owing to a still sluggish economic picture).
Why did BMO cut its main home loan interest rate?
To win a greater share of the mortgage business in Canada.
The bank’s mortgage book is smaller than the ones held by rivals like TD, Scotiabank and Royal Bank, and it wants to muscle its way into a bigger chunk of the pie. Lower rates will get borrowers through the door.
READ MORE Rock bottom interest rates keep homes affordable for now, RBC says
Just like consumers, BMO’s own borrowing costs also remain super low by historical standards.
Banks and lenders fund mortgage loans through money they themselves borrow. The interest they pay remains extremely low because of a series of factors, but the main one is the still-sluggish economic performance of the Canadian and U.S. economies.
That’s forced central banks like the Bank of Canada and U.S. Federal Reserve, which have a major influence on overall lending, to keep their benchmark borrowing rates at or around 1.0 per cent in an effort to keep credit flowing and promote economic growth.
Mortgage rates are more directly influenced by the bond market, however. And after a run up in bond yields last year (which lifted mortgage rates as well), they have fallen back in recent months.
A BMO spokesperson said in statement the decision to cut its five-year fixed rate was tied to the fall in bond yields which have allowed the bank to pass the lower rates onto borrowers.
Is this good or bad for the housing market?
That depends. It’s good for borrowers who can lock into the lowest rates offered in decades (if not longer), but policy makers and economy watchers will be anxious about the effect the cut will have on fueling higher home prices and ever-elevated debt levels.
The cut isn’t big enough to bring droves of new buyers into the market, but it will be enough to convince many to take on new or bigger mortgages experts say — especially if or when other big banks follow suit and match BMO.
With consumer debt levels sitting at all-time highs and home prices continuing to climb fast across many major markets, the last thing the Bank of Canada and the new finance minister want is households piling on more debt.
READ MORE: January price gains strain affordability in big city housing markets
The last time the big banks cut rates below 3 per cent in early 2013, then-Finance Minister Jim Flaherty directly intervened, forcing them to lift mortgage rates and warned the banks to undertake “responsible lending” practices.
In a statement, Joe Oliver, the new finance minister, said Thursday Ottawa was “monitoring” events “closely.”
“Our government has take action in the past to reduce consumer indebtedness.”
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