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Is BMO’s Rate Cut the First of Many We’ll See?

Last spring was a tumultuous time for the mortgage market – especially if you were Finance Minister Jim Flaherty. Mortgage interest rates were at rock-bottom lows (and still are,) we didn’t have the strict mortgage rules that are in place now, and banks started to compete for business. Seriously compete for business. Most of them dropped their rates to as low as 2.99% on five-year fixed mortgages. Seeming to be lurking in muddy waters, and snapping up whatever customers they could during the borrowing frenzy, Flaherty sensed trouble and issued a warning about “irresponsible lending.” Now it seems, he may have to do it again. 

That indication came on Sunday, when Bank of Montreal once again reduced their rates on five-year fixed mortgages to 2.99 per cent from the already-low 3.09 per cent. They dropped the rate on their 10-year fixed to 3.69 per cent, as well, giving even longer-term borrowers a much better deal than you can find at many of the major banks right now.

The move isn’t all that surprising, except for the fact that a bank decided to go against Flaherty’s warnings, albeit a year from the previous one and with more mortgage rules in place now. And BMO was also the first bank to start offering these incredibly low rates last time the multiple rounds of mortgage wars took place. BMO is also one of the banks that has recently stepped away from the mortgage broker channel, meaning that they need to step up their profits in some form. These low rates may be just the way they do it.

So, is the Finance Minister worried that we’ll see those kinds of mortgage wars again? It doesn’t seem that way. In a statement to the Globe and Mail yesterday, Jim Flaherty stated,

“My expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.”

But perhaps Mr. Flaherty is keeping mum on the subject right now due to the fact that housing is in a slump, and he doesn’t mind some incentives for qualified borrowers? If that’s the case, NDP finance critic Peggy Nash says that she understands. But she also doesn’t think that’s the way to do it.

“I think it would not be helpful if we got into a mortgage rate war, because that obviously will get more people in the market, some of whom maybe shouldn’t be there,” she says.

What do you think? Is BMO once again, just the tip of the iceberg when it comes to mortgage interest rates, and what banks will do to get the most customers through their door? Or do you think banks learned their lesson last time, and they’re not so eager to engage in such lending practices once again?

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