Ottawa warns banks after Bank of Montreal cuts mortgage rate

Mon Mar 4, 2013 11:57am EST
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* Finance Minister Flaherty calls for prudent lending

* Discourages U.S.-style "race to the bottom" by banks

* Banks worried about lending crunch; profits still strong

By Louise Egan

OTTAWA, March 4 (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 , 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.   Continued...