The amount of chatter that the Bank of Montreal’s mortgage rate cut generated this week is more proof that Canadians are not yet sick of talking about real estate. But it's unclear how much of an effect the new 2.99 per cent five-year rate will have in terms of driving new buyers to the market.
"I’m not sure it's going to be a huge driver of a massive spring selling season," said Ben Rabidoux, president of the market research firm North Cove Advisors, which specializes in real estate. "I think it's probably very likely that after this promotion ends that they reset their rates back to 3.5 per cent, and it's probably not going to be matched by the other big banks."
The reduced five-year fixed mortgage rate, down from 3.49 per cent, is being offered until April 17 and, according to BMO, is in part a reaction to falling bond yields, which generally dictate the direction in which banks move their long-term mortgage rates.
'It’s very clear to me that this is a marketing gimmick.' - Ben Rabidoux, president, North Cove Advisors
Banks fund their mortgages through bond markets so when yields are high, banks have to pay out higher interest on those bonds and pass that cost on to customers through higher mortgage rates. When they are low, they can afford to pass the savings on in the form of lower rates.
Bond yields on the benchmark five-year Government of Canada bond have been fairly stable in the past month, in the range of 1.61 to 1.69 per cent, but have fallen since the beginning of the year, when they stood at 1.93 per cent.
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But Rabidoux suspects BMO's move has less to do with bond yields than with drumming up new business ahead of April and May, which tend to be strong months in the real estate market. He points out that the last time BMO moved rates to 2.99 per cent — in March 2013 — bond yields were 40 basis points lower than they are now.
"It’s very clear to me that this is a marketing gimmick," he said. "The funding costs are significantly higher than they were last year for BMO. What that means is that BMO’s making very little money on those mortgages, and it’s very unlikely that that's going to last."
Brokers, others already offering 2.99% or less
The growth in mortgage loans is slowing, and banks are competing harder for dwindling volumes and consequently having to accept smaller profit margins.
"I think that's what this really speaks to. BMO is looking at the spring selling season and saying, 'What are we going to do to attract volume?'" Rabidoux said.
'BMO is just responding to what's already been going on out there in the broker [industry].' - Paul Poirier, mortgage broker
Often, banks will use the low rate to get customers in the door and then hope to make the real money by peddling other products such as credit cards and lines of credit.
Although BMO's rate cut got a lot of attention, the bank is not the first to drop its rate below three per cent. TD Canada Trust, Scotiabank and CIBC already offer four-year fixed rates below three per cent while Ontario's Meridian Credit Union and various mortgage brokers have been offering a 2.99 per cent five-year rate since last month — and Meridian recently bumped its down to 2.98 per cent.
"BMO is just responding to what's already been going on out there in the broker channel," said Paul Poirier, who has been a mortgage broker in the Greater Toronto Area for 15 years and currently works with the Eagle Group, a franchise of Dominion Lending Centres.
"It’s a constant battle between the branches and the brokers."
Poirier said Thursday that he had already fielded inquiries from clients asking him to match BMO's new rate. He said he expects that mortgage brokers, who get about 40 per cent of Canada's mortgage business, will be working hard to undercut it in the coming days and weeks,
"Brokers feel pressure to go even lower, especially if the customer is already a BMO client (who can get additional in-house services like a line of credit). It's the only way we can swing them to come over to us," he said.
Unlike Rabidoux, Poirier does expect the other banks to adjust their rates to compete with BMO. Even if they don't do so publicly, several brokers said that BMO's competitors would probably cut clients a deal if asked to match the rate.
Poirier recalls that BMO's last well-publicized rate cut down to 2.99 per cent — at a time when rates were closer to 3.1 per cent — sent lenders scrambling to match it and ended up costing him some clients.
"There's a lot of business floating around [in the mortgage market]; we're talking hundreds of millions of dollars," he said.
Low rates the norm
Canadians have gotten used to extremely low mortgage rates in recent years, which means that a rate cut like BMO's just doesn't make the kind of impact that it once did, said Benjamin Tal, deputy chief economist of CIBC World Markets.
"We have a generation of Canadians that have never experienced high or even rising mortgage rates. For them, those extremely low mortgage rates, that's the norm, so it's not as exciting as it used to be," he said. "The marginal impact of lower rates is there, but it's not as significant as it was in the past."
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There are also other considerations that factor into the decision to enter the housing market, such as the job market and the ability to shoulder the other up-front costs of buying a home, such as land-transfer and property taxes.
While a 2.99 per cent mortgage might make home ownership a bit more affordable, in tight markets like Toronto, it's unlikely to make much of a difference.
"Right now, there's between 10 and 20 offers on every good downtown house, so it's pretty frustrating for buyers right now," said Alice Kent, a real estate agent with Bosley Real Estate in Toronto.
She says rate shifts are generally not enough to pull someone into the market and are watched closely mainly by those already ready to buy or existing homeowners who are are nearing the end of their mortgage term and looking to refinance.
"It's like watching gas prices: you only care when you pull up to the pump," Kent said.
Rate won't help supply shortage
Kent says the rate cut might be enough to prompt some people to refinance or to switch from a variable-rate mortgage to a fixed rate, which, she suspects, was part of BMO's intention.
Agents and brokers disagree on which type of mortgage is the better bet, and ultimately, it will depend on one's personal circumstances.
'People are stretching themselves to the limit in order to get into the market.' - Alice Kent, Bosley Real Estate
Many see a fixed mortgage as the safer option, particularly now, as there's little difference between fixed and variable rates. It's also generally easier to qualify for a five-year fixed mortgage since brokers can use the actual mortgage rate when assessing eligibility rather than the government's benchmark qualifying rate of 5.24 per cent, said Poirier.
Kent, however, says for many of her clients who are getting into fierce bidding wars for downtown properties, a variable rate can make home ownership a tad more affordable.
"It’s just so expensive to get into the housing market. It just saves you that little bit more per month," she said. "If it saves you $200 a month, it's worth it, because people are stretching themselves to the limit in order to get into the market."
Marcus Tzaferis, founder of the mortgage firm MorCan Direct, agrees that with the prime interest rate expected to stay low for at least the next two years, home buyers are better off with a variable rate, but one that gives them some room to insulate themselves against future rises in the interest rate.
"The best product is a variable rate that has some flexibility, that allows you to benefit from how depressed rates are right now with the ability to lock in when your mortgage broker, let's say, sees bond yields starting to rise and notices the impact that might have on fixed rates," he said.
Rate cuts come at a cost
Tzaferis says that while BMO's new 2.99 five-year fixed rate might seem enticing at first glance, would-be homebuyers need to pay close attention to the many restrictions attached to it and might be better off taking a higher rate with more flexibility.
"This is not a deal, in my opinion," he said.
The discounted rate comes at the price of limited options when it comes to things such as refinancing, adding someone to the title, transferring the mortgage to another property or having someone else take it over.
"It's so restrictive for the many things that Canadians do with their mortgages," Tzaferis said. "[Basically], the only way to get out of that mortgage is by selling your home."
It also has a shorter amortization period than some other closed mortgages with higher rates (25 years vs 30) and a lower cap on the amount that you can prepay onto your mortgage (10 per cent vs 15 or 20 per cent).
Mortgage terms can be "really punishing," says Tzaferis, which is why it's important to go over the fine details with someone who is knowledgeable about the market and not tied to any one specific lender.
Whatever the terms, it's a good bet that Canadians will be in the market for mortgages for some time yet.
While February house sales were down in most major markets and some analysts, such as Rabidoux, say cities like Ottawa and Montreal are already in the midst of a housing market correction, others say a genuine drop-off in demand is still a long way off.
"The housing market in Canada has nine lives. Every time it's supposed to slow down because of high interest rates, something bad happens elsewhere that keeps interest rates low," Tal said.