When did it become the job of the minister of finance to boost bank profits and stick it to the consumer?
How else do you describe a policy in which the minister of finance appears to tell the banks to cool it when it comes to battling on the mortgage front for customers.
If I?m buying a home today I say: Bring on the mortgage rate wars!
?Race to the bottom? proves it?s a great time to be in debt
Let?s face it: This is a great time to be in debt. Never mind the warnings from bank officials, economic handwringers, Prime Minister Stephen Harper and Finance Minister Jim Flaherty. Today, Mr. Flaherty is warning banks not to cut rates too low in a ?race to the bottom? ? as if competition were a destructive part of banking.
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But Jim Flaherty?s comments seemed aimed at getting the banks to try and curb some of the heated competition that happened a year ago when the banks started battling for market share.
?As for decisions by individual banks, as I have said repeatedly before, my expectation is the banks will engage in prudent lending ? not the type of race to the bottom practices that led to the mortgage crisis in the United States,? Mr. Flaherty said Monday.
The finance minister has moved on four separate occasions to tighten mortgage rules. One of his toughest measures has been to lower amortization lengths.
Amortization lengths climbed to as high as 40 years but after three cuts are now back to 25, the long-term standard. A longer amortization lowers monthly payments at the cost of more interest but also allows a buyer to qualify for a larger loan.
No one can say for sure how much impact Mr. Flaherty will have on the banks ? he does have bigger concerns about an overheated housing market than making sure you get the best rate.
But the reality is the banks have a little room to give, considering government of Canada five-year bonds have been trading 25 basis points lower since a peak at the end of January. The savings should be passed on.
?The spread between the five-year mortgage and five-year bond is quite large,? said Gregory Klump, chief economist with the Canadian Real Estate Association.
Bank of Montreal appears to have kicked off the discussion again with its five-year closed mortgage rate of 2.99%.
It is hardly the only bank out there with a deal. National Bank has quietly offered 2.99% to some customers and is willing to commit to that rate for 120 days based on a signed deal, say brokers.
The much publicized BMO deal also includes some tough restrictions that include an inability to break the mortgage and switch banks and yearly prepayment privileges of 10% of your mortgage instead of the industry standard of 20%.
Kelvin Mangaroo, president of ratesupermarket.ca, said obviously the finance minister is concerned about people taking on more debt.
But there is a certain reality that if the banks don?t pass on better rates, consumers will go to one of the many monoline lenders that fund mortgage brokers.
?It comes down to each person and what each person can tolerate,? said Mr. Mangaroo, about the extra cost a consumer might face for not shopping around.
As bond yields have dropped, it has become easier for those monoline lenders to compete with the banks that won?t match with lower rates.
?We know BMO was gaining market share at the expense of margins,? said Mr. Mangaroo.
Peter Routledge, an analyst with National Bank Financial, said the banks look to mortgages as much for generating other business as the profit itself.
?They make more of their money from the relationship,? said Mr. Routledge. ?The mortgage is such a tight spread product, I don?t think they make a lot of money on it.?
Most consumers would probably like to see them make even less and might prefer the finance minister stay out of it. And, if he won?t, there?s always the brokers and generally lower rates.
Financial Post, with files from Gordon Isfeld
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