Mortgage rates in Canada

It is making the airwaves that the Bank of Montreal is offering a 5-year fixed rate mortgage at a 2.99% APR rate. There are slightly less favourable conditions attached to such a mortgage (lower prepayments throughout the mortgage), but otherwise this is the lowest 5-year fixed rate ever offered.

With the risk-free 5-year government bond rate at 1.3%, the bank is still making money from the loan. I’m guessing the only people qualifying for such a mortgage would be those that have very good credit ratings and those purchasing homes with reasonable leverage (e.g. 25% down payment or above).

Interestingly enough, since most financial institutions have raised rates on their variable rate mortgages – (last year there were offerings that went as low as prime minus 0.9%, or 2.1% with existing interest rates, while today you will be lucky to receive prime minus 0.25%), it makes the fixed rate offer a significantly superior option. Although I do not believe short term rates are going anywhere in 2012, it is difficult to fathom that short term rates will still remain at the levels they are through the duration of a five year term.

This is yet another function of the low interest rate environment where people are encouraged to financially leverage on cheap credit. At 3%, why not spend the extra $100,000 on those granite counters? That’s only $250/month extra…

The argument that low interest rates increase asset prices is a simple mathematical argument, but the real estate market in the USA, where interest rates are equivalently low for long-duration mortgages, is proving that rates alone are not a sufficient explanation for asset values.