Banks cut key mortgage rate amid fears of lofty housing market Add to ...
Bank of Montreal has renewed the mortgage war among Canada’s banks, slashing the posted rate on its five-year fixed mortgage to 2.79 per cent from 2.99 per cent, even as Ottawa and the International Monetary Fund fret over the state of Canada’s overheating housing market.
Toronto-Dominion Bank quickly rushed to match BMO’s rate special, saying it will drop its five-year fixed mortgage rate from 3.09 per cent to 2.79 starting Wednesday.
The big banks had slashed their mortgage rates in January, soon after the Bank of Canada unexpectedly lowered its key rate in an effort to provide stimulus to the economy. Those cuts took posted rates as low as 2.84 per cent.
However, this latest move from BMO follows the central bank’s decision last week to hold its key rate unchanged and is likely a pre-emptive strike against other big banks, as well as a strike against smaller lenders who have been undercutting the banks with cutthroat rates of their own.
The continuing battle for mortgages comes at a delicate time for Canada’s housing market though. Debt-to-income levels have surged above 163 per cent, suggesting household finances are becoming stretched.
Some markets look particularly lofty: In Toronto, the average price for a detached home rose above $1-million in February, up 9 per cent from last year.
The IMF has taken notice, warning Ottawa that efforts to tighten mortgage lending standards have not gone far enough, with home prices now overvalued by as much as 20 per cent.
Within Canada, there are also concerns. The Bank of Canada mused recently that home prices could be as much as 30 per cent overvalued, and the government has previously issued warnings of its own.
Yet top executives at the big banks routinely characterize the country’s housing market as healthy, arguing that there is a relatively even balance between the supply of housing and demand among consumers. They also note that their lending standards are solid.
“We feel good about the Canadian housing market,” Royal Bank of Canada CEO David McKay told a New York audience last week.
Finance Minister Joe Oliver’s office declined to comment on the banks’ rate cuts.
Canada’s top financial regulator doesn't sound concerned about the potential impact of lower mortgage rates on the financial system.
“At OSFI, 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,” said Jeremy Rudin, Superintendent of Financial Institutions, in a prepared speech to the International Finance Club of Montreal.
In an interview, he added that OSFI’s role is to make sure the banks can measure those risks and manage them, and have enough capital to absorb any potential shocks without affecting their operations and services.
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