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BMO’s mortgage rate cut may prompt rivals to match, experts say

Bank of Montreal is re-introducing rock-bottom interest rates on fixed five-year home loans as the housing market slows and competition for fewer new mortgages heats up.

BMO, which pulled the same move last January, leading to a brief price war among the country’s big banks, is hoping to recoup some market share, which it has bled in recent years after it stopped selling loans through smaller independent lenders.

Experts are already calling for others to price-match BMO.

“I think what you’ll see is, that as the growth in the mortgage market is slowing, and bank profit growth slows, you’re going to see more aggressive market share strategies,” David McVay, principal at Toronto consultancy McVay and Associates, Ltd.

Yet with record-high debt levels among consumers, is a return to ultra-low rates a good idea? McVay isn’t concerned.

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“There’s a fair discussion today about encouraging customers into the market. I don’t really buy that,” he said. “I don’t think 10 or 20 basis points on a mortgage are going to change materially the number of consumers going into the market place.”

Brokers and banks have already been quietly lending at rates below 3 per cent in recent weeks, according to Christopher Molder, a broker in Toronto.

BMO’s public declaration that it’s lowering its fixed five-year rate back to 2.99 per cent from 3.09 per cent is an advertising move, he said.

“This is about marketing,” he said.

Still, the lower rate may make some who are concerned about rising debt levels even more nervous.

Ottawa moved last summer to rein in mortgage lending standards, starting with tighter conditions for mortgage insurance. The maximum term on insured home loans was moved down to 25 years, which means borrowers have to muster higher down payments.

BMO’s move – and the possible response from rival banks and borrowers – drew comment from a cautious Finance Minster Jim Flaherty.

In a statement Monday, he said he expected “prudent lending” from big lenders, “not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.”

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Canada’s top 10 mortgage lenders:

1. Royal Bank of Canada   $196-billion   17.98 per cent of market
 
 

2. Scotiabank                  $187-billion   16.18 %
 
 

3. TD Bank                      $172-billion   14.95 %
 
 

4. CIBC                           $147-billion   12.72 %
 
 

5. Desjardins                   $86-billion     7.53 %
 
 

6. BMO                           $80-billion     6.94 %
 
 

7. First National               $48-billion     4.23 %
 
 

8. National Bank               $34-billion    2.96 %
 
 

9. ING Direct                    $30-billion    2.58 %
 
 

10. HSBC                         $19-billion     1.64 %  

(Source: McVay and Associates, Ltd., Dec. 2012)

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