Ottawa warns banks after Bank of Montreal cuts mortgage rate

Mon Mar 4, 2013 11:57am EST
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By Louise Egan

OTTAWA (Reuters) - Canadian Finance Minister Jim Flaherty warned the country's banks on Monday not to engage in the kind of risky lending that led to the U.S. housing crisis, after Bank of Montreal cut a popular mortgage rate back to a near-record low.

Record-high household debt, fueled partly by ultra-low borrowing costs, remains a nagging concern for Flaherty even as Canada's once-hot housing market starts to cool.

"As I have said repeatedly before, my expectation is that banks will engage in prudent lending - not the type of ‘race to the bottom' practices that led to a mortgage crisis in the United States," Flaherty said in an emailed statement.

The stern words followed an announcement by Bank of Montreal (BMO.TO: Quote), the country's fourth-largest lender, that it is lowering the rate on its five-year fixed-rate mortgage to 2.99 percent from 3.09 percent. The rate is only for mortgages to be paid back in 25 years or less.

BMO had dropped the rate to 2.99 percent for a period in 2012. Commentators said this was the lowest-ever rate advertised by major Canadian bank for that type of mortgage.

Spurred on by the BMO move, some lenders went even further, bringing mortgage rates down to their lowest on record.

When some markets showed signs of overvalued housing and overbuilding, Flaherty responded by tightening the rules on government-insured mortgages for the fourth time in four years. The government took other administrative steps to cool a market it feared might overheat.

The central bank has kept its benchmark overnight lending target at 1.0 percent since September 2010, although central Bank of Canada chief Mark Carney has been signaling plans to hike rates for the past several months.   Continued...