Fierce competition among banks and home buyers is driving mortgage rates down and home prices up, signalling the start of a spring housing market that many observers expect will be particularly heated this year.
Bank of Montreal unveiled a 2.79-per-cent promotion for its five-year, fixed-rate mortgage Tuesday, a special that comes with prepayment restrictions. Toronto-Dominion Bank quickly rushed to match the offering, saying it will drop the posted rate on its standard five-year mortgage to 2.79 per cent, from 3.09, starting Wednesday. Canadian Imperial Bank of Commerce began offering a five-year fixed mortgage earlier this month with a rate that starts at 1.99 per cent for the first 9 months before rising to an average of 2.79 per cent. It resets to [2.92] after 9 months.
BMO’s move was largely expected: It is the fourth year the bank has come out with a low teaser rate in the spring since it raised the ire of former Finance Minister Jim Flaherty with a 2.99 per cent special in 2012.
A spokesperson for Finance Minister Joe Oliver declined comment on the mortgage rate cuts.
Meanwhile, Canada’s top financial regulator said he isn’t concerned about the potential impact of lower mortgage rates on the financial system.
“We constantly reinforce that it is the banks themselves that determine the risks they want to assume, risks they must subsequently measure, monitor and manage,” Jeremy Rudin, head of Office of the Superintendent of Financial Institutions (OSFI), said in a prepared speech to the International Finance Club of Montreal.
Several mortgage brokers, however, called the posted rate specials a gimmick. Most major banks have already been publicly offering rates to brokers as low as 2.74 per cent for standard five-year mortgages for the past several weeks.
“Every mortgage broker in Canada is offering at those rates,” said Toronto-based mortgage broker Ron Butler. Several banks are offering rates as low as 2.69 per cent on larger mortgages, with some brokers offering to sacrifice part of their commission to push rates as low as 2.44 per cent.
The renewed rate war among the major banks underscores the intense competition coming just as the spring housing market is set to bloom.
In the Toronto area home prices were up nearly 11 per cent in the first two weeks of March compared to the same time last year, the Toronto Real Estate Board said. In Vancouver, where homes sales have also been strong this year, the average detached house now sells for nearly $1.4 million.
Ratehub, an online mortgage rate comparison tool, has seen record traffic to its website since the Bank of Canada slashed interest rates in January, said chief marketing officer Kerri-Lynn McAlister.
“In Southwestern Ontario and the Lower Mainland of British Columbia, it’s going to be one of the hottest years on record,” thanks to record low rates, Mr. Butler said.
Yet, despite strong home sales in some regions, banks have struggled to grow their new mortgage loans with housing markets cooling outside of Ontario and B.C. amid sliding oil prices.
The growth rate of residential loans has steadily slowed over the past two years to roughly 4 per cent, from 9 per cent in 2013, according to data from OSFI. BMO in particular has seen its total personal and commercial loan growth rate slow from 10.1 per cent in the first quarter of last year to 3.7 per cent this year.
That means rates could fall further. With government bond yields falling to record lows, the spread between where banks borrow and where they lend is now 1.95 percentage points compared with 1.3 per cent a year ago, when mortgages rates were higher, leaving room for more rate cuts.
Banks have also been engaged in a tug-of-war between fixed and variable rate mortgages, often getting more aggressive on fixed mortgage rates when too many borrowers flock to variable mortgages because of falling interest rates. “It skews the balance sheet for the lenders and they have no choice,” but to offer more attractive fixed rates, said Jason Henneberry, a partner at B.C.-based MortgagePal. “They need to try to fill the pipeline with more fixed-rate mortgages so they can hit the targets that they’re mandated to hit.”
Falling rates have been a gift for Ben Rodgers and his wife, first-time buyers who have spent the past two years shopping for a house in Toronto’s heated market. Earlier this month, they were the winning bidder on a $725,000 two-bedroom semi-detached home in their current neighbourhood and are now shopping around for the best mortgage rate.
“Banks were bending over backward to preapprove us for even more than we could afford. But we knew the maximum mortgage we could carry and we’re not going to be wooed by lower rates.”
Mr. Rodgers said the couple, who are in their 40s with two young children, said they long planned to use the low rates as an opportunity to pay down their mortgage faster, rather than splurge on a bigger home. “We’re going to live a pretty spartan existence for the next little while no matter how low the rates go,” he said. “We’re planning for the long-term.”
Source: Tamsin McMahon, The Globe and Mail with files from David Berman