Bank unveils lowest rate in history

The lowest mortgage rate in Canadian history could add a few more months to a spree of record housing sales in Canada, a Queen's University real estate expert says.

The Bank of Montreal announced late Thursday it had dropped its five-year, fixed-rate mortgage by 0.5% to 2.99%.
"That is pretty significant," said Dr. John Andrew, director of the university's executive seminars on corporate and investment real estate.

The mortgage rate is only available until Jan. 25 and comes with conditions, including a 25-year amortization period. Borrowers can also only make lump sum payments of up to 10% of the principal each year.

Andrew said the restrictions that come with the new rate are in line with the federal government's insistence on responsible lending.
"Overall, it's a cheaper loan but it is harder to qualify for," Andrew said.
The restrictions would make it impossible for those few people who could receive a loan at the record-low interest rate and rapidly pay it off in two or three years.
"The reality is very few homeowners can afford to do that," Andrew said.

The record-low mortgage rate could be enough to entice new home buyers to enter the market. It will also benefit home owners looking to refinance their existing mortgage.

Andrew said the limited time offer is likely in place because other banks will follow suit and slash their mortgage rates.

By Friday, Toronto Dominion Bank responded, dropping its four-year, fixed rate mortgage to 2.99 per cent. That offer is in place until Feb. 29.

It's designed to prevent consumers from being upset when interest rate goes back up near the end of the month, Andrew said.

Andrew said economists have already begun to question how long housing prices in Canada will continue to climb. He said some banks have predicted a plateau in housing sales and inventory in the coming months.
Even at 2.99 per cent, Andrew said banks should still make money because they have been able to sell bonds internationally at record levels at interest rates even lower.
Selling a bond at a lower interest rate indicates investors have more confidence in Canadian bank bonds, Andrew said.
"That spread represents bank profit," Andrew said.
A week ago, BMO sold $1.5 billion worth of bonds at a rate of 2.54%.

eferguson@thewhig.com
The Kingston Whig Standard

By Elliot Ferguson