Bank of Montreal’s move to lower its five-year fixed mortgage rate could bring on a new price battle from mortgage lenders leading up to the spring housing market, even as the market has shown signs of cooling.
Over the weekend, BMO lowered the rate to 2.99 per cent from 3.09 per cent, which is the lowest published rate among Canada’s big five banks.
“What you do have is an environment where you’re starting to see evidence of lending growth slowing and so you have a couple of levers at your disposal. Bank of Montreal does appear to be looking at pricing as an option to stem the decline on their own volumes,” said John Aiken, a financial services analyst with Barclays.
In a release on Monday, the bank said the move was to lock in rates ahead of an anticipated interest hike by the Bank of Canada. The central bank has been hinting for months rates will eventually need to rise, even though its language turned slightly dovish in January.
Ernie Johannson, senior vice president of personal banking Canada at BMO Financial Group, said the bank's efforts to encourage Canadians to pay down debt and build equity in their homes “have been aligned with minister (Jim) Flaherty's timely and prudent actions to encourage moderation in the housing market." The mantra is to "go fixed, go five, lock-in now" and become mortgage-free faster with a shorter 25-year amortization, he said in a statement.
The move comes at a time when the housing market has showed signs of cooling. Flaherty has repeatedly expressed concerns about the housing market getting overheated and last summer put in place tighter lending rules to calm the once-hot real estate market.
The market is still divided on the extent of the housing market slowdown, though most experts expect a cooling off rather than a crash.
The Canadian Real Estate Association said last month that national home sales activity edged up on a month-over-month basis in January.
"Given that the most likely trend in interest rates is upward and that longer-term interest rates are likely to move first, we believe that locking in for five years is the superior choice," said Doug Porter, chief economist at BMO Capital Markets.
Longer-term rates, such as five-year mortgages, can start moving higher well in advance of any action by the Bank of Canada, added Porter, who noted current five-year interest rates remain exceptionally low.
“A five-year term gives borrowers ample protection against the possibility of rates returning to more typical levels in the next few years," Porter said.
While it’s possible other banks may follow suit, Aiken said he doesn’t expect “this is going to lead to hyper competition within mortgage pricing.”
“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 told the newspaper.
Lower rates could lure more buyers into the housing market this spring, and encourage some buyers to take out larger mortgages than they otherwise would, bolstering house prices, the Globe added.