BMO mortgage cut may prompt price war

BMO's move to cut its benchmark five-year mortgage rate to under three per cent could spur other banks to follow suit in the lead-up to the busy spring home-buying season.

Over the weekend, Bank of Montreal cut its five-year fixed rate by 10 basis points, from 3.09 to 2.99 per cent. That's the lowest the rate the bank has offered for a posted rate since the start of 2012.

"Our message to Canadians is simple," BMO vice-president Ernie Johannson said. "Go fixed, go five, lock in now at a terrific rate and become mortgage-free faster with a shorter 25-year amortization."

The last time BMO cut its rates like that, it prompted others to match, creating a buyer's market for people looking to borrow money to finance a home purchase.

"The market will once again begin talking about pricing pressure in the domestic mortgage market," Barclays analyst John Aiken said in a note following the move on Monday.

"Banks will be banks," said David Madani, chief economist with research firm Capital Economics. "It's not the first time the banks have tried to undercut each other in order to prop up their loan growth," Madani said.

Madani, who has been pessimistic about Canada's housing market for a while, said he expects the rate may entice first time buyers to take the plunge.

"Some people believe housing prices only go up, so it's now or never," he said. "Particularly first-time buyers, they look at today's mortgage rates and say, 'If I don't buy today, I'll be priced out.' "

'Race to the bottom'

Last year, the banks raced to gobble market share from each other, and consumers benefited from the lowest fixed mortgage rates on record. That's a good thing for a prospective home buyer, but cheap credit comes with its own risks as it can lead people to take on even more debt.

Indeed, government officials are sounding the alarm ahead of any sort of race to the bottom in home lending. "As I have said repeatedly before, 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," Finance Minister Jim Flaherty told CBC News in a statement Monday.

Ottawa has stepped in to cool down an overheated mortgage market before. The flurry of activity that resulted from the rate hikes in early 2012 was the final straw that caused government to step in and slap a cap on the length of a government-insured mortgage at 25 years and making it broadly harder to get one.

"Our government has taken action several times to make sure the housing market remains sound," Flaherty said.

Those changes achieved their desired goal of slowing the housing market as national average prices and sales figures in many regions have posted monthly declines for the last several months.

Marketing ploy

A targeted push by the banks to offer cheaper home loans would certainly spur more people to buy houses, and likely push prices up in the process.

But there are some who note the move is likely just a marketing ploy aimed at carving the bank a bigger slice of the same-sized mortgage pie.  Aiken noted that last year's price war created very little change in market share for total domestic mortgage volumes among the big six banks.

"It's not something that's going to create any additional activity," Toronto mortgage broker Marcus Tzaferis of Morcan Direct told CBC News. He said the rate may appeal to existing mortgage holders looking to refinance at a lower rate, but he doesn't expect any widespread flurry of new sales because of it, even if BMO's big competitors match.

Tzaferis notes that the yield on a five-year Government of Canada bond is currently at 1.3 per cent, and banks like to keep their five-year rates about 1.5 percentage points above that.

"Really they should be around 2.8," he says. Indeed, Tzaferis notes many mortgage brokers have been able to offer clients five-year fixed-rate mortgages below three per cent for a while now. But big banks such as BMO tend to be bellwethers for broader trends.