Good news! The mortgage wars are back. Bad news! The mortgage wars are back. It all depends on your perspective.
If you’re an aspiring homeowner or you want to refinance to pay off back-breaking credit card debt, thelatest battle of the banks for market share is a terrific opportunity.
If you’re Bank of Canada Governor Mark Carney, it’s a slap in the face. You’re the most influential financial person in the country and you’ve been spending a lot of time during the past two years warning Canadians about the dangers of their ever-increasing debt levels. And what is the banking oligarchy doing in response? Thumbing their collective noses at you by encouraging people to take on even more debt!
The latest cat fight for mortgage market share couldn’t have come at a better time for prospective borrowers. The spring housing season is just starting to heat up and prices stubbornly continue at record highs despite alarm bells that the bubble could burst any time soon. In this climate, any break on mortgage rates that makes your dream home more affordable is welcome.
The mortgage market is a Wild West show right now. The banks are aggressively undercutting one another to build their business before the low-interest window closes. Bank of Montreal kicked off the latest round of rate-cutting by offering a five-year closed mortgage at 2.99 per cent and an even more eye-popping 10-year rate of 3.99 per cent.
Royal Bank has countered with an “all the frills” four-year fixed rate of 2.99 per cent with amortizations up to 30 years. That translates into a monthly payment of $1,260 on a $300,000 loan. By comparison, at 5 per cent the monthly carrying cost would be just over $1,600. Royal even offers to pay the switching costs if you move your business from another financial institution. Talk about dog-eat-dog!
Most other banks are offering similar deals just to stay in the game. For the moment, this is a true buyer’s market for borrowers but it may not last long. Some of the deals have fixed termination dates (e.g. March 28 for BMO’s 10-year 3.99 per cent rate). Others could be pulled at any time.
Meanwhile, in Ottawa, Carney must be seething. The last thing he wants to see is Canadians jacking up their household debt to income ratios even more. But short of intervening directly in the private sector, which he would be reluctant to do except under extreme circumstances, his hands are pretty much tied.
He’d love to raise the key overnight target rate from its current level of 1 per cent but for the moment he’s a prisoner of the domestic economy and international forces. The recovery is still fragile and the high loonie continues to hurt our export markets. Still, you can bet he’ll make a move at the first possible opportunity.
Do you remember in high school when your English teacher would make you parse lines from Shakespeare? That’s what economists do when the Bank of Canada issues its interest rate statements. They dissect every line, looking for clues that indicate any subtle shifts in position that might suggest a move up or down in the near future. They found several such clues in the March 8 announcement that the overnight rate would remain unchanged for now.
“The heightened uncertainty around the global economic outlook has decreased in the weeks since the Bank released its January Monetary Policy Report (MPR),” the statement said. “With tentative signs of stabilization in European bank funding and sovereign debt markets, conditions in global financial markets have improved and risk aversion has decreased.”
Reduced global uncertainty. Signs of stability in Europe. Global financial markets looking better. Less risk aversion. Hmm.
The statement went on: “Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk.”
It doesn’t take an economist to read between the lines here. With the global economy improving and household debt “the biggest domestic risk” interest rate increases are on the way sooner rather than later.
The U.S. Federal Reserve Board’s pledge to hold its rates at record lows until 2014 is a problem because it means a Canadian rate increase will probably push the loonie even higher. But Carney may be prepared to live with that to try to shake the country out of its debt spiral.
So if you are thinking about borrowing money, my advice is to act now. The window may be closing faster than you think. And here’s another tip. Take the longest low-rate option you can find. You may not see anything like it again in your lifetime.
Gordon Pape is editor and publisher of the Internet Wealth Builder newsletter. His website iswww.BuildingWealth.ca