MPs worry about effect of BMO mortgage cut

MPs are voicing concerns about how much debt consumers could take on after BMO cut its five-year mortgage rate to the lowest it's been in more than a year.

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 rate the bank has posted since the start of 2012. Consumers can often negotiate even lower rates than those advertised by the banks.

The last time BMO cut its posted rate that low, other banks moved to match it.

NDP finance critic Peggy Nash says lower rates are a sign of a flat economy as banks seek new opportunities to generate business.

"The danger is consumers are already highly leveraged at the highest personal debt levels in our history and there is a danger again of consumers taking on ultimately too high a level of personal debt," she said.

Finance Minister Jim Flaherty raised that same concern over the weekend upon news of the rate cut.

"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," Flaherty said in a statement. 

Consumer debt at all-time high

Last December, Statistics Canada reported consumer debt levels had hit an all-time high of 164.6 per cent in the quarter covering July to September. That means for every $1 of disposable income, the average consumer owes $1.65.

Liberal MP John McCallum, a former senior vice-president and chief economist of the Royal Bank of Canada, says BMO is trying to make money at a time when housing sales have been dropping.

"Banks are in there to make money so it's not surprising that they are doing what they are doing. But I think there is a risk that it will induce people who can't really afford it to buy a bigger house than they can really afford, and down the road when interest rates go up, this could cause problems, and I think that's what [Bank of Canada Governor] Mark Carney and the government are concerned about," McCallum said.

Interest rates are bound to rise again, McCallum pointed out, it's just that nobody knows when exactly that will happen. Consumers, he said, should look at their own circumstances before deciding how much of a mortgage they can afford.

"I think they should figure out, well, 'what would happen to me if the rate went from three to five [per cent], for example. Could I still afford it? How secure is my job?' These sorts of individual personal questions people have to ask themselves," McCallum said.

"I don't always agree with Jim Flaherty but I think I do on this case, that it's a balancing act and you don't want to kill the market but you don't want it to become irrationally exuberant, and he's walking that fine line, and I think he's pretty well doing it right."

Nash says consumer debt levels are worrisome.

"It's a concern . . . what it's speaking to is generally incomes are flat and people are taking on more debt as a way to meet their expenses," she said.