Monday Morning Quarterback: Ready, Set, Rate War!

Mortgage | March 31, 2014

“War.  Aaah.  Huh.  What is……it good for?”

(absolutely nothing)

Unless, of course, you’re a buyer in today’s Toronto real estate market.

Surely you noticed that the 5-year, fixed-rate dropped to 2.99% last week via several financial institutions.

But before you get all excited, thinking that houses are going to be more affordable, consider whether or not lower rates will lead to higher real estate prices…


This is like deja-vu all over again!

In March of 2013, the “Big Five” banks engaged in an all-out, take-no-prisoners mortgage rate war, that started with one bank lowering their posted 5-year, fixed-rate mortgage to 2.99%, and the other four banks had no choice but to follow.

I remember thinking, “This is absolutely nuts.  It’s as close as you can come to free money.”

The 2.99% rates only lasted a few months, and the 5-year rate moved as high as 3.59% in 2013.

But here we are, all over again.

I’d like to go through a few newspaper snippets from last week, starting with the Globe & Mail who posted the first story last Thursday.



“BMO Slashes Key Mortgage Rate”
By: Tara Perkins & Tim Kiladze
The Globe & Mail

Just one week after Jim Flaherty stepped down, Bank of Montreal is shaking up the mortgage market, aggressively cutting its five-year rate to levels that caused the former finance minister to intervene last year.

BMO is now offering five-year fixed mortgages at 2.99 per cent, slashing its rate from 3.49 per cent. While that’s not the lowest rate in the market, BMO is the first big bank to move below the sensitive 3-per-cent threshold.

The last time a Canadian bank’s mortgage rates fell this low, in March of 2013, Mr. Flaherty stepped in and publicly called for “responsible lending” because he worried about an overheated housing market.

Asked whether Mr. Flaherty’s departure had anything to do with the bank’s decision, BMO spokesman Paul Deegan wrote in an e-mail that “the timing is driven by the fall in bond yields and that we are in what has traditionally been the busiest season for home buying.” Five-year Government of Canada bond yields have risen slightly over the past two months, but BMO looked back six months to make its decision.

Joe Oliver, Mr. Flaherty’s successor as Finance Minister, could not be reached for comment.

BMO’s rate cut comes after Toronto-Dominion Bank lowered its four-year rate to 2.97 per cent earlier in March. Last week, shortly after Mr. Flaherty stepped down, Bank of Nova Scotia also slashed its mortgage rates, and instituted a special 2.94-per-cent four-year rate.

At least one credit union also moved its five-year rate to 2.99 per cent in February.

BMO’s decision came the same day that Canada’s biggest banks made it clear they are all but counting out the chance of a major correction in housing prices.



“Why The Mortgage Rate Wars Can Rage More Freely: No Flaherty, No Carney”
By: John Greenwood & Gary Marr
Financial Post

TORONTO • Why did Bank of Montreal risk a (verbal) slap from Finance Minister Joe Oliver for daring to chop its five-year mortgage rate below 3%?

Because they knew the mortgage war is going to be different this time.

On previous occasions when the banks publicized rates below the government’s favoured minimum, they found themselves on the receiving end of angry calls from Mr. Oliver’s predecessor, Jim Flaherty, who resigned on March 18.

Mr. Oliver seems in no mood to quarrel with Bay Street and ready to largely leave the mortgage market to its own devices.

“There’s a market and the bank made its decision, and the chief executive officer of the Bank of Montreal informed me about it,” Mr. Oliver told reporters Thursday in Ottawa. “I listened to his explanation, his reasons. I reiterated what I’ve just stated — the government is gradually reducing its involvement in the mortgage market.”

Asked if the government would take further steps if a housing bubble formed, Mr. Oliver said: “I don’t have to get into a hypothetical negative.”


“Why Cut-Rate Mortgages Won’t Be Here For Long”
By: Michael Babad
The Globe & Mail

BMO says it’s got nothing to do with Mr. Flaherty’s week-old resignation, but rather is based on the measure of the bond market and the fact that housing is entering its crucial spring season.

But one of BMO’s economists suggests bargain rates won’t last.

“Canadian mortgage rates are once again on the decline, reflecting the rally in bond markets this year,” said senior economist Sal Guatieri of the bank’s investment arm, BMO Nesbitt Burns.

“Dovish Bank of Canada talk, lower inflation, slower economic growth (albeit largely weather-related), emerging market turbulence, and Ukraine’s crisis have helped drive yields on 5-year benchmark bonds down a quarter percentage point since the start of the year,” he added.

“That said, with growth expected to warm up alongside the temperatures, bond yields will likely turn higher this year.”

Other observers also see higher, though not surging, rates going forward.

“We expect the pace of Canadian house price growth will slow this year,” said Adrienne Warren of Bank of Nova Scotia’s economics research department.

“Sales have been weakening since last fall as higher prices alongside tougher mortgage rules eroded affordability,” she said in a new global housing outlook today.

“Recent declines in some fixed mortgage rates may provide some temporary relief, although modestly higher borrowing costs are still on the horizon as global growth picks up. An emerging oversupply of condominiums in several large urban centres also risks putting downward pressure on prices.”



You simply cannot ignore the timing of all this.

Is it a coincidence that this happened a week after Jim Flaherty resigned?  Or do banks feel like they can “get away with it” easier?

I’ll be honest: I’m voting for coincidence, since I really don’t think the banks care what anybody says.  But I’ve seen a half-dozen articles in the past week suggesting otherwise.

It’s also interesting to note that as time goes on, we’re seeing more and more articles like the last one – suggesting that the lower rates are only here for the short-term, and that just like last year, they’ll be gone before you know it.

It goes without saying, but if you’re an active buyer in today’s market, go and get yourself pre-approved for a mortgage, and perhaps with a broker (I know, I always push the brokers…) who can lock-in that rate for six months.

Because if and when the five-year, fixed-rate mortgage goes back up to 3.49% later this summer or fall, and you’ve locked in a 2.99% rate, you’ll be looking back and laughing.  Yes, actually laughing.

The monthly mortgage payment for an $800,000 house with 20% down is $3,025.49 at 2.99%.

That payment rises to $3,191.95 when rates are at 3.49%.

I guess it’s “only” $166.46, but that’s every month, for five years.  It’s ten grand.

However, you have to ask yourself whether or not these lower rates – in some cases, fifty basis points, will bring new buyers, or more buyers into the market.  As well as whether increased affordability will lead to higher prices.

The $700-$900K price point is so incredibly tight right now.

$699,900 listings are selling for $850,000, or more.

Perhaps it’s not unreasonable to suggest that lower interest rates are the last thing this red-hot real estate market needs right now?

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  1. Darren

    at 9:38 am

    Those deals are very restrictive. If I was getting a mortgage today I wouldn’t want one. I’d rather have extra flexibility.

  2. DocBenway

    at 7:29 pm

    Is it common for one to use the flexibility that may be available to them? In informal surveys of friends and family, I have learned most wish they had but never actually did.

  3. DocBenway

    at 7:31 pm

    What options would people want in their mortgage the most? Ability to pay lump sum, extra payments, miss a payment etc?

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