Bank of Montreal is reigniting the mortgage wars among the country's major banks.
Canada's fourth-largest bank is bringing historic low rates back into the market, only a few weeks after it and several other lenders pulled similar discounts, amid concerns over collapsing profit margins. The bank lowered the rate on a five-year mortgage to 2.99 per cent, a drop of a half a percentage point. It also cut the rate on 10-year mortgages to just 3.99 per cent, a level that no Big Five bank has posted until now.
It is expected that other lenders will roll out similar offers in the coming days to avoid losing market share to a rival. The potential of another price war in the mortgage market will be good news to prospective buyers at a time when real-estate prices appear stretched, especially in major markets like Vancouver. But it also highlights the challenge facing policy makers such as Bank of Canada Governor Mark Carney, who would like to tamp down Canadians' appetite for debt.
BMO's rates take effect in the next several days and will be in the market until March 28. Both the five-year and 10-year offers apply to a 25-year amortization.
This is the second time this year BMO has tried to shake up the mortgage market by offering five-year loans at less than 3 per cent. The first, in January, prompted a skirmish across the sector, with some offering four-year mortgages at the same interest rate. At the time, Royal Bank of Canada's head of Canadian retail banking, David McKay, said the bank was moving its prices in response to a "market attacker" in BMO.
Frank Techar, the head of Canadian retail banking at BMO, took umbrage to being called an attacker. "I didn't know I had to ask permission from my competition," to lower rates, Mr. Techar said.
"To be really clear, none of them matched us back in January. They matched us on the rate, but on a four-year term. We offered one more year of protection against rising rates."
Those words are an indicator of the tone of the mortgage market these days, as banks try to boost volumes to make up for thinner margins because of low rates. But it is also a sign of the times at BMO: It comes a week after it reported sluggish first-quarter profits in its Canadian lending operations, which were down 6.7 per cent.
Mr. Techar said BMO saw a significant jump in mortgage sales in January, but that the bank is not effectively trying to buy market share by offering deals. "The reason we are back in the marketplace is because of the positive reaction we had back in January," he said.
After scrambling to match the discounts in January, several rival lenders then pulled their offers early – a sign that some weren't willing to surrender their profit margins. The battle also drew attention from Ottawa, where both the central bank and Finance Department have raised concerns over Canadians racking up too much debt in a low interest rate environment.
Banks are promoting fixed-term mortgages as a way for customers to lock in low rates now. However, some mortgage advisers say they aren't sold on the strategy.
Dustan Woodhouse, a mortgage consultant in Vancouver, said he still recommends his customers stay on variable rate mortgages unless they are certain they will stay in their existing house for five or 10 years, something few young buyers do. Getting out of a fixed-rate mortgage can often result in stiff penalties, said Mr. Woodhouse, who estimates he has written more than 500 mortgages in the past three years, and said none of them were 10-year fixed rate loans.
"Your family expands and contracts, your income tends to expand and contract through those years. It can be kids being born, kids moving out, or you get married or divorced. All these different things when they happen tend to trigger the breaking of a mortgage," Mr. Woodhouse said. "I tell people to take a look at your life in three-year increments."
When the last round of discounts were pulled from the market in February, several bank executives speculated the low rates were gone for good. HSBC Bank Canada chief executive officer Lindsay Gordon said in a recent interview that he believed the banks had "throttled back" on the discounts after rushing to preserve their market share.
BMO's announcement comes amid forecasts that the housing market in Canada will be flat over the next two years. An economist at Bank of Nova Scotia told Reuters on Wednesday that a dramatic drop in home values is not expected in the next 24 months, but said average prices will remain near 2011 levels.