Rate Cut Could Spark Price WarRea
In an effort to boost the lagging mortgage business, BMO got a jumpstart on its competitors this Monday by announcing one of the best mortgage deals out there – a five-year, fixed rate at 2.99 per cent. Observers feel the other major banks will follow the lead and cut their terms as well, setting off what could become a mortgage war, reminiscent of what took place in the U.S. before the crash.
On one hand, rate competition is great news for home buyers. Without really caring about long-term implications, they can finally avail themselves of a lower, locked-in rate not previously available in Canada. “Our message to Canadians is simple: go fixed, go five, lock-in now at a terrific rate and become mortgage-free faster with a shorter 25-year amortization,” Ernie Johannson, BMO’s senior vice-president, personal banking Canada said in a statement.
But federal Finance Minister Jim Flaherty isn’t so sure rate cuts are a good idea. In a statement to the media responding to BMO’s move, Flaherty cautioned banks not to get involved in a price war: “the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.”
Doug Porter, Chief Economist, BMO Capital Markets, played down this worry, saying the new rate gives customers: “ample protection against the possibility of rates returning to more typical levels in the next few years.”