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Banks cut mortgage rates to spur home buying

Bank of Montreal has chopped its benchmark five-year mortgage rate, aggressively throwing its weight behind what many are calling an increasingly wobbly housing market.

“It’s a great time to buy a home,” Martin Nel, a senior BMO official, said in news release announcing the change. He added that people who take advantage of the offer will benefit.

“If ever there was a time to buy, it is now,” Mr. Nel said.

The move which takes effect Thursday brings the bank’s key five-year rate to 3.59%, down from 3.79%, making it one of the lowest five-year rates ever offered by a Canadian bank, says industry newsletter Canadian Mortgage Trends.

But some experts are already scratching their heads because of the aggressive tone of the announcement as well as the timing, given the recent spate of warnings about the uncertain state of the market, including one earlier this week from the Canadian Centre for Policy alternatives predicting an imminent collapse.

When the big banks make mortgage rate changes they generally just disclose the new numbers without commenting on housing market conditions. If pressed, bank officials are usually quick to explain that the change in these consumer lending rates are merely a function of fluctuations in their own borrowing costs.

“It’s a bit puzzling to me,” John Andrew, a professor at Queen’s University’s School of Urban and Regional Planning, said of the BMO announcement. “Perhaps they are concerned that the number of new customers will fall off precipitously.”

Residential real estate prices have been in free-fall in the United States as well as many European countries in contrast to the Canadian market, which has been on a tear for a good part of the past decade with prices in many cities at record levels.

But analysts worry that it’s only a matter of time before the Canadian housing market moves in the same direction, and they point to warning signs that have already appeared.

Earlier this year Moody’s reported that debt to income levels of Canadian households is the highest ever and close to where they were in the United States before that market started to fall apart in 2007.

The Bank of Canada has raised concerns that the high debt loads of Canadian consumers has made them vulnerable to changes in interest rates and potential deterioration of the economy.

In a bid to crack down on what some described as reckless real estate speculation, the Federal Government brought in new regulations in the spring to make it harder for first-time buyers to qualify for government-backed mortgage insurance.

Borrowers must now meet standards for a five-year fixed-rate mortgage, even if they want a shorter-term, variable-rate product. As the key measuring stick for many home buyers, a lower five-year mortgage rate will mean more people will qualify to buy more expensive homes than with a higher mortgage rate.

The tougher rules had the desired effect. The recent imposition of the new harmonized sales tax in Ontario and British Columbia also impacted demand, and as a result the market cooled so much that industry insiders became worried it had gone too far.

The housing market is important to the banks because residential mortgages make up the single biggest asset class on their balance sheets.

There are nearly $1-trillion of home loans outstanding, according to the Bank of Canada, about half of which is held by the chartered banks.

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