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Monthly Mortgage Update: April 2013

Are banks racing to the bottom?

If you’re thinking of buying a home this spring, there’s never been a better time to get a mortgage. Despite the fact that most lenders are no longer offering juicy discounts on variable mortgage rates today, you can still lock into some of the lowest fixed mortgage rates Canadians have ever seen. And with the housing market cooling – home sales are down 15.8 per cent nationally compared to a year ago – some banks are trying to woo homebuyers back into the market.

In early March, the Bank of Montreal (BMO) brought back its 2.99 per cent 5-year fixed rate mortgage. While locking in at 2.99 per cent may sound like a good deal, the product – which stemmed a string of mortgage rates wars among banks in early 2012 – comes with some serious restrictions. For example, if you’re planning to aggressively pay down your mortgage, you unfortunately only get 10%/10% prepayment privileges (many lenders offer 20%/20%). You also don’t have the option to transfer your mortgage to another lender until your 5-year term is up.

Despite the fact that mortgage brokers have been offering sub 3.00 per cent mortgage rates with better prepayment privileges for months now, Finance Minister Jim Flaherty felt the need to step in and ask other banks not to follow in BMO’s footsteps. While his concerns seemed slightly unnecessary, Manulife quickly followed suit by offering a 2.89 per cent 5-year fixed rate. With consumer debt rising to similar levels seen before the U.S. housing crash in 2008, Flaherty chose to step in yet again and asked Manulife to reverse its decision. Manulife agreed and put its 5-year fixed rate back up to 3.09 per cent.

The question on our minds now is: With economic growth at a standstill and inflation under control, making an interest rate increase highly unlikely, could we see a fifth round of mortgage rule changes if lenders continue their race to the bottom?

Could the new mortgage rules still be too tough for first-time buyers?

Almost nine months ago, on July 9th, 2012, Flaherty made a change to the mortgage rules that pushed a number of first-time buyers out of the market. By restricting the maximum amortization period to just 25 years, down from 30, buyers were left with one of two choices: buy a smaller home or wait and save a larger down payment. These options don’t bode well for the head of the Canadian Association of Accredited Mortgage Professionals (CAAMP) Jim Murphy.

With home sales slumping, Murphy recently suggested that first-time buyers be able to choose 30-year mortgages, so long as they actually qualify for a 25-year mortgage; this could help buyers get into more expensive markets, such as Toronto and Vancouver, by allowing them to make smaller monthly mortgage payments. Murphy also suggested the federal government increase the First-Time Home Buyers’ Tax Credit. With a number of Baby Boomers looking to stay put, while first-time buyers continue to sit on the sidelines, it remains to be seen if we’ll see the same robust house appreciation over the next 10 years as we experienced in the last decade.

The overnight lending rate stays the same

It came as no surprise that the Bank of Canada (BoC) once again left the overnight lending rate at 1.00 per cent, last month; this marked the 30th consecutive month that the key interest rate remained unchanged, and April could be the 31st. If you have a variable rate mortgage, this is great news, as your interest rate remains the same and you can continue to pay down your mortgage as quick as ever. With most economists predicting the earliest rate increase to come in 2014, there’s never been a better time to take advantage of your prepayment privileges.