By Tim Shufelt
When the Bank of Montreal dropped its key mortgage rate below the 3% threshold in March, Paula Roberts started to get calls from her clients. They wanted to know if they should break their mortgages and refinance at BMO’s limited-time, bargain-basement 2.99% rate—the lowest rate ever officially offered by a Canadian bank for a five-year, fixed-rate mortgage. The sudden surge in interest baffled the Toronto mortgage broker. After all, these were clients who were already locked into mortgages with even lower rates and better terms than BMO’s. “All of our lenders were at lower than 2.99% at that point,” Roberts said.
It’s an open secret that Canadian homebuyers can secure mortgages on the cheap these days. BMO simply advertised the kind of lending practices that were already widespread. But stating the obvious got the bank plenty of attention—from media, from Canadian borrowers and from the federal government.
Finance Minister Jim Flaherty also picked up the phone, calling BMO to register his disapproval of the rate reduction. “My expectation is that banks will engage in prudent lending—not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.” He thanked the country’s other big banks for not following BMO’s lead. Manulife Bank apparently missed the subtext of that message, subsequently announcing a 2.89% mortgage offering. Flaherty blasted the promotion, calling it “unacceptable.”
After “consulting with the Department of Finance,” Manulife withdrew the offer the next day. BMO let its promotion expire at the end of March. Thus was restored the don’t-ask-don’t-tell practice of supplying discount mortgages without making too much of a fuss about it. “I bet if you went out today to any bank, if you have the right credit score and the down payment, you’d get a 2.89% mortgage,” says Peter Routledge, an analyst at National Bank Financial.
In reprimanding the financial sector, Flaherty again warned of risky household debt accumulation. But he also objected to the optics of the mortgage fire sale, adding: “It’s also symbolic.” In the midst of the effort to avert a housing crash and convince Canadians to stop borrowing, here were BMO and Manulife publicizing cut-rate housing debt with all the discretion of used-car salesmen. But you can hardly blame them. Fewer homes are being sold in Canada, reducing the demand for new mortgages. It’s simple economics: when demand falls, so do prices. To vie for the patronage of the dwindling ranks of borrowers, banks have to sweeten the terms of their mortgages.
Banks can afford to slash rates because money has never been cheaper in Canada. While the federal government appeals for restraint in debt accumulation, the Bank of Canada’s interest rate policy encourages just the opposite. And since policy rates aren’t likely to budge for at least another year, Flaherty is left to glower at banks from up on high while mortgage rates continue to drop. Just how low they go will be limited only by the banks’ profit margins and the government’s persuasiveness in discouraging loose borrowing and lending. “I really can’t see them going any lower. But I said that before,” Roberts says. “Who would have thought they would have gone this low?” There’s never been a better time to get a mortgage than right now. But there soon could be.
Having saved up enough money for a down payment while living with his parents in Toronto, Lucas Shearer decided to make his first foray into the real estate market in January. He quickly found the right place—a $344,000 condo in the Yonge and Eglinton neighbourhood—after qualifying for a 2.89% five-year fixed-rate mortgage. “At a higher rate, it definitely would not be as attractive,” he says. “I probably would have just stayed at home, saved more money and assessed it in a year from now.” Compared to the average discounted rate on five-year mortgages over the past five years, which according to ratehub.ca is about 4.25%, Shearer will have saved about $18,000 in interest and owe $6,000 less by the time his mortgage expires. Compared to the 6% peak five-year rate over the past five years, Shearer will save more than $50,000.
While Shearer wasn’t compelled to buy real estate by low mortgage rates alone, they were an added incentive that made the market more attractive to him. This runs counter to the government’s deliberate attempt to contain housing activity. Bank of Canada governor Mark Carney warned of a “brutal reckoning” when rates eventually climb and expose the finances of many households as unsustainable. There are those homeowners who can afford a $700,000 home today, but could only afford a $500,000 home at 6.5%, which is where rates could conceivably sit in five years when new mortgages expire, says John Andrew, a real estate professor at Queen’s University.
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