With the Canadian housing market expected to cool in the coming year, the Bank of Montreal has lowered its five-year fixed mortgage rate to a record low.
While the rate was slashed to 2.99 per cent Thursday, down half a point, it does come with a few hitches.
The bank set a Jan. 25 deadline to apply as well as an amortization limit of 25 years. It also capped the maximum yearly lump-sum payment at 10 per cent of the principal.
The overnight interest rate set by the Bank of Canada, now at one per cent, banks clamouring for a piece of a tighter market and cheaper bonds are reasons why mortgages are so low right now, RBC Global Asset Management's Eric Lascelles told 麻豆影视 Channel Friday.
But buyers should be thinking ahead when rates eventually return to "normal," he said.
"I think it is fairly clear that home prices are overdone in certain urban areas. The map I've done says if we ever return to normal interest rates, home prices are 15 per cent too high," Lascelles said.
That doesn't mean home values need to come down by that amount, he added, suggesting instead prices could stagnate for a few years and be matched by higher household incomes to ease any bubble "reasonably benignly."
The caveat for homeowners is to buy what they can afford because when rates rise again and the mortgage needs to be renewed, refinancing costs can be overwhelming, Lascelles said.
BMO's offer comes at a time when the big banks are also pressuring Ottawa to lower the maximum amortization period (the number of years a person has to pay off a mortgage), now set at 30.
It had been 40 years but persistent worries over the accumulated debt of Canadians convinced the federal government to lower it over the past two years.
The latest mortgage cut by BMO will likely trigger increased competition among the major banks as they battle for a share of the shrinking housing market. The five-year fixed rate is used by the banks as a benchmark for borrowing costs and is typically the rate applied to first-time homebuyers.
The BMO rate cut is good news for people shopping for a home and bad news for those worried about a potential housing bubble, says a Queen's University professor who specializes in real estate.
"This move by BMO will no doubt be quickly followed by the other major banks," said John Andrew in a media release Friday, adding rate cuts have actually been lagging behind falling bond yields that are typically the barometer of mortgage costs.
"What's interesting are the conditions that BMO has attached to this mortgage rate, which are consistent with the lending industry's move to even more responsible lending practices," he said.
It did not take long for other major lenders to follow suit -- by Friday afternoon both TD Bank and RBC Royal Bank were offering four-year special fixed rate mortgages at 2.99 per cent. Both offers expire in February.
Other banks are expected to make similar offers as they struggle with reduced borrowing by consumers.
As well, a lingering question will be how long historically low mortgage rates can sustain housing prices and sales across the country that already appear to have peaked, Andrews said.
The average Canadian home price will rise by only 2.8 per cent this year, Royal LePage said Thursday in its quarterly report, noting the increase would be lower than the rate of inflation.
The average selling price of a home across the country in November was $360,396, a 4.6 per cent increase over the same month last year. That's down from double-digit increases in the first part of 2011.
With files from Canadian Press
