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The Bank of Montreal made a pre-emptive strike against fellow big six lenders Monday, slashing its rate on a promotional five-year fixed mortgage to 2.79 percent from 2.99 percent. BMO hopes to gain market share from big chartered competitors as well as smaller lenders offering competitive rates that have lured in many with less restrictive lending rules.
BMO is the first to cut mortgage rates after the Bank of Canada's decision to hold its overnight lending rate firm last week, following the unexpected cut in January. BMO’s new “smart” mortgage comes just as new homebuyers start to flood real estate markets in the spring, but also on the heels of a flurry of economic data and negative sentiment suggesting markets and household debt are at dangerous levels.
The International Monetary Fund (IMF) has recently pushed for tighter lending rules in Canada, and Ottawa has repeatedly warned housing markets in Canada’s urban centres are putting the nation’s economy at risk. Data released last week by Statistics Canada shows debut to household income reached a record high in the fourth quarter of last year at 163 percent.
Still, BMO’s chief economist says now is the right time to consider a fixed income mortgage.
“Given long-term interest rates are close to all-time lows, and recent market uncertainty, there are some benefits to locking into a fixed rate mortgage. Combined with a shorter, 25-year amortization period, such a step would significantly dampen widespread concerns about the vulnerable of household finances,” said Douglas Porter in a press release introducing the BMO Smart Fixed Mortgage.
The “smart” branding refers to the ability to accelerate payments by 10 percent monthly or make a 10 percent lump sum payment at the end of each year.
CTV News Chief Financial Commentator Pattie Lovett-Reid says while BMO is clearly capitalizing on the public relations opportunity and looking to court new customers, this new lending product has considerable upside for new home buyers.
“With this type of product, you have a 25-year amortization, you have a lower rate, and you can accelerate the payment by 10 percent. You’re going to pay it off sooner. Presumably, the banks like it because you pay that off and put money into something else,” she said.
Lovett-Reid says many Canadians, including her son, are weighing news like the report out of the IMF against opportunities like BMO’s new lending product ahead of making a home purchase.
“I flipped him the press release [from BMO] and said, ‘Good timing don’t you think?’ And he said, ‘Yes but I just read the IMF report you flipped me last week, and there’s a bubble and supposedly it’s overvalued. I got a push and pull,’” said Lovett-Reid.
While it may not be enough to get anxious potential home buyers to jump into the market with both feet, she says BMO made a wise move introducing a new and innovative lending vehicle in time for spring. She expects other lenders to follow their lead with less restricted “smart” products.
“They are not making a lot of money on the product itself, so why not bring in people in terms of volume and get it out there first. It’s the leader of the pack.