Prior to his departure, Flaherty had imposed a number of restrictions on Canada's mortgage market, particularly in regards to amortization periods, loan-to-value ratios and pre-payment penalties. His intent was to stabilize the housing market, and protect against potential oversaturation of debt.
With Flaherty gone, the Bank of Montreal (BMO) signaled their return to mortgage competitiveness with a promotion offering a five-year fixed-rate mortgage at 2.99%. This rate was significantly lower than those offered by other major banks; Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto Dominion Bank, and Bank of Nova Scotia all offered five-year fixed rates of 3.09% or higher.
The BMO promotion was part of a larger trend of banks seeking to attract new business by offering low mortgage rates, despite increased restrictions on mortgages set out by the government and central bank policies. BMO’s decision to offer a lower rate encouraged competition in the market, as other banks had to take steps if they wanted to remain competitive in the face of lowered rates.
BMO was also careful not to commit to a long-term rate or discount, unlike other major banks. This meant that if interest rates increased in the future, so too would the mortgage rates offered by BMO. As such, BMO’s new offer was seen as a short-term incentive for consumers to refinance or purchase property in the current financial climate.
In the wake of Flaherty's departure, it is clear that banks have taken advantage of the opportunity to compete for customers. Low rates and promotions are now available for consumers looking to purchase or refinance a property. However, it remains to be seen how long this situation will last. The Canadian government has expressed concerns over an overheated housing market, and could impose additional restrictions in the near future.
Analysis:
Jim Flaherty’s resignation from his post as Finance Minister in March of 2014 left the Canadian banking and mortgage industry to ponder what changes the new government would bring. Prior to his departure, Flaherty had implemented various restrictions on Canada’s mortgage market in order to try and stabilize the housing market and protect against potential debt overextensions.
The Bank of Montreal (BMO) responded to the leadership shift by announcing a promotion - a five-year fixed-rate mortgage at 2.99%. This rate was much lower than those offered by other major banks; Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto Dominion Bank, and Bank of Nova Scotia all offered five-year fixed rates of 3.09% or higher. This successful promotion signified the start of a competitive market in the mortgage sector of the Canadian economy.
BMO’s offered rate was seen as a temporary incentive for individuals who were either refinancing or purchasing a property. This was because BMO did not commit their rate for the long-term, which meant that if interest rates went up, so too would the mortgage rate offered by BMO.
It is clear that Canadian banks are taking advantage of the current situation to compete for business. BMO is the most recent example of a bank providing low rates and incentives in an effort to draw in customers. That being said, it is uncertain how long these offers will remain available, as the Canadian government has shown concerns over an overheated housing market, and could potentially impose further restrictions in the near future.
This article was contributed on Oct 19, 2023
