Finance Minister Jim Flaherty is issuing a warning to the country’s banks, as stiff competition for mortgage customers is prompting lenders to cut rates heading into the key spring home-buying season.
“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,” Mr. Flaherty said in a statement to the Globe on Sunday, after Bank of Montreal reduced its price on five-year fixed-rate mortgages to 2.99 per cent from 3.09 per cent.
That was the lowest advertised five-year mortgage rate among the big banks as of Sunday afternoon, although lower rates are available in the market.
BMO sparked controversy when it first introduced this rate, which at the time was a new low, in January of 2012, spurring a price war among lenders. The big banks backed off the ultra-low posted rates after a short period of time last year.
At the same time, Ottawa was urging Canadians to stop taking on too much debt and bidding up prices to unsustainable levels.
The Bank of Canada has been warning that high household debt levels, the bulk of which come from mortgages, are the largest risk facing the country’s economy. Canada’s housing market rebounded quicker than most from the financial crisis, causing some observers to question whether a bubble was forming.
But home sales have been dropping substantially on a year-over-year basis for months now, and with the most important season for those sales now kicking into gear, competition among lenders is heating up. Mortgages are the largest segment of the banks’ core Canadian lending businesses. “There is no question that the Canadian banking industry is facing slightly slower growth as a result of slower mortgage demand,” Gord Nixon, CEO of Royal Bank of Canada, the country’s largest mortgage lender, said on a conference call last week.
Lower rates could entice more buyers into the housing market this spring, and encourage some buyers to take out larger mortgages than they otherwise would, lending support to house prices. That’s not what policy-makers in Ottawa are hoping for.
Mr. Flaherty noted Sunday that he has taken action “to make sure the housing market remains sound.” He tightened the mortgage insurance rules in July, amid concern the market was overheating, making it slightly more difficult for borrowers to obtain mortgages. The changes included cutting the maximum length of an insured mortgage to 25 years from 30. Home sales subsequently fell sharply in the fall, compared to their levels a year earlier, and have not rebounded since. Economists have been debating how much sticking power Mr. Flaherty’s actions will have.
In a press release Ernie Johannson, senior vice-president of personal banking in Canada for BMO, said “BMO’s efforts to encourage Canadians to pay down debt and build equity in their homes have been aligned with Minister Flaherty’s timely and prudent actions to encourage moderation in the housing market.”
With consumer debt at record levels, Mr. Flaherty told the Globe in January that he would be pleased if the market softens further. “I don’t mind prices coming down a bit, too,” he said.
Some mortgage brokers derided BMO’s newly advertised price as a marketing gimmick on Sunday, noting that a number of banks have already begun offering that rate again. Banks’ advertised, or posted, mortgage rates mask the discounts that many if not most customers can obtain by haggling.
“Most banks aren’t advertising 2.99 per cent, but I know if you walk into any branch in the city right now they’ll start off with 2.99 per cent as the starting rate,” said Christopher Molder, a Toronto mortgage broker.
The lowest available five-year fixed rate fell to 2.79 per cent in February, according to Alyssa Richard, CEO and founder of Ratehub.ca. That’s the lowest such rate the site has ever seen, she said. And a couple of major banks have lower posted rates for three-year mortgages.
BMO has been seeking to bolster its mortgage sales since it stopped using mortgage brokers about four years ago. It still has the lowest mortgage market share among the five largest banks, according to Canaccord Genuity analyst Mario Mendonca.
Because borrowers will often place their deposits, credit cards and other products with the bank they have a mortgage with, banks put a large emphasis on getting mortgage customers in the door. During the heat of the mortgage price wars early in 2012 some bankers said they were losing money on new mortgages.
Analysts questioned whether lower rates are really a wise move by banks right now.
“How credit worthy is the marginal mortgage borrower in a market with a debt-to-income ratio at 163 per cent and an all-time high home ownership rate?” asked National Bank analyst Peter Routledge.
Since the banks offload much of their mortgage risk to the government by way of mortgage insurance, mortgages alone are unlikely to heap too much risk onto the lenders, he added. “But if they are cross-selling other products, such as credit cards, maybe they are moving down the credit curve,” he said. “No convincing evidence of credit problems this quarter, but we shall see in the quarters ahead.”
NDP finance critic Peggy Nash said in an interview that she can understand why BMO would lower rates to encourage buying during a sluggish economy.
But “I think it would not be helpful if we got into a mortgage rate war, because that obviously will get more people into the market, some of whom maybe shouldn’t be there,” she added.