Banks start to shave mortgage rates

OTTAWA—Despite ongoing concerns about high levels of debt, interest rates in Canada are going nowhere except perhaps down, say analysts following the latest move by one major bank to shave fixed mortgage rates.
With bond yields trending south and the housing market slowing, the Bank of Montreal over the weekend dropped its posted five-year fixed mortgage rate by 0.10 points to 2.99 percent in an effort to attract new borrowers.

Others may follow suit, although analysts note that many borrowers had been able to negotiate the new BMO posted rate, and in some cases even lower costs, for some time.
Finance minister Jim Flaherty responded with a warning to banks not to engage in a “race to the bottom practices that led to a mortgage crisis in the United States.”
But analysts said the banks merely are responding to the natural forces in the market given that the Bank of Canada appears rooted to keeping its trend-setting policy rate at one percent for much longer than was anticipated a few months ago.
Borrowing costs for banks have fallen, said David Madani, chief economist with Capital Economics in Toronto, freeing room for banks to lower their rates.
He noted that last week Royal Bank chief executive Gord Nixon said the demand for mortgages also has dropped.
“Banks will be banks,” Madani said. “It’s not the first time the banks have tried to undercut each other in order to prop up their loan growth.”
And interest rates are unlikely to feel any upward pressure anytime soon, said CIBC chief economist Avery Shenfeld.
CIBC World Markets today extended its forecast for when the central bank would start hiking rates to the third quarter of 2014—six months longer than it previously had anticipated.
Lower mortgage costs could revive what has been a slowing housing market, say analysts.
But since household debt is at record highs and income growth has been modest, the inducement may not be as effective as it might have been previously.
“Borrowing is slowing anyway, so I don’t believe that a modest drop [will make much of a difference],” said Shenfeld.
“A modest drop in five-year mortgage rates might induce more people to lock in rather than take a variable mortgage, but I doubt it will have a huge impact on the volume on borrowing.”