Canada's Finance Minister has taken his battle against a housing bubble an extraordinary step further, issuing rare praise for the country's banks for not matching Bank of Montreal's cut-rate mortgages, which the lender rolled out a week ago in an attempt to drum up new business.
With the possibility of a mortgage price war looming, Jim Flaherty said on Friday that he spoke with BMO this week after the bank cut its five-year, fixed-rate mortgage last weekend to 2.99 per cent, expressing how troubled he was by the cut from 3.09 per cent.
Though the government is usually reluctant to wade into individual banking matters such as one lender's rates, Ottawa is growing concerned the banks could end up causing the housing market to overheat, especially after Mr. Flaherty has gone to great lengths to cool the market over the past year.
"I spoke with [BMO] about that this week and expressed my concern … in two ways," Mr. Flaherty told reporters in Ottawa.
"One, it's an objective reduction, of course, but it's also symbolic, and I remain concerned with the housing market in Canada," said the Finance Minister, whose latest round of mortgage restrictions, last summer, led to a rapid cooling in residential real estate.
"We've seen some moderation in the housing market, which I think is a good thing. As you know, we've tightened up the mortgage insurance rules four times over the recent years, so I thank those Canadian financial institutions that have not chosen to reduce their rates further."
Mr. Flaherty and Bank of Canada Governor Mark Carney have waged an all-out war against the massive build-up in consumer debt to record levels. Along with Mr. Flaherty's restrictions – which reduced the maximum amortization on mortgages last year to 25 years, down from 30 – the central bank went so far as to warn it could raise interest rates to tame the borrowing binge. However the Bank of Canada backed away from that just this week, signalling it has seen a cooling in consumers' penchant for debt.
Mr. Flaherty's comments Friday mark an escalation in the debate between government and the financial community over the housing market, and banks that are looking to sell more mortgages amid heated competition. Some questioned Mr. Flaherty's move to influence mortgage rates.
"It's strange to be concerned about banks offering low rates, if the worry is that consumers might like low rates and are willing to take them up on the deal, because banks are in the business of making money by underwriting prudent mortgages and if they didn't do that they'd be in a lot of trouble with their shareholders," said Finn Poschmann, vice-president of research for the C.D. Howe Institute, a think tank.
BMO's new five-year fixed rate, with a 25-year amortization period, would mean a monthly payment of $2,363.66 on a $500,000 mortgage, compared with $2,389.38 at the previous rate of 3.09 per cent. Over the five years, a borrower would save $2,361.75 in interest with the lower rate.
BMO has actively promoted the rate in the past week through advertisements and in media interviews. Bank of Montreal spokesman Paul Deegan said the bank would not comment on the Finance Minister's statements.
When BMO ignited a similar controversy a year ago by introducing the same bargain-basement rates, the government was similarly unhappy, but did not go public with its concerns.
"I encourage responsible lending," Mr. Flaherty said Friday. "I think that the financial institutions of course are major players in the residential mortgage market and it forms a major part of their asset portfolios and the Government of Canada has a lot to say about it, not only because we're concerned about the economic fiscal health of the country, but also we have CMHC [the federal mortgage insurer] and many of those mortgages held by the private sector financial institutions are insured with Canada Mortgage and Housing Corp."
Mr. Flaherty's praise of BMO's rivals may be somewhat off target, though, since most of the lending sector is quietly offering the same rates as BMO, mortgage professionals say
Several rival banks are offering similar posted rates on four-year mortgages. And mortgage advisers such as Vancouver's Robert McLister point out that qualified customers have been able to get those rates – or even slightly lower – for the past several weeks, even though they aren't being publicized. The low rates are also being driven in part by a drop in funding costs for the banks since mid-February.
The heated competition on mortgages comes as the banks get ready for the busy spring and early-summer home-buying season, when they do about half their mortgage business for the year.