Cheap bonds responsible for declining mortgage rates

The seeping of a powerful global demand for Canadian bank bonds through the system is responsible for unprecedented low mortgage rates at the level of consumers.

While the Bank of Montreal recently moved its rate for 5-year fixed mortgage to 2.99% - the lowest rated posted by any bank in the history of Canada, BMO also declared a discounted rate, which was followed by TD that lowered its rate for 4-year fixed mortgage to 2.99%.

The new BMO offer, expiring on January 25, limits lump sum payments to 10% of the principal every year and is centered on an amortization of 25 years. The offer by TD is valid till February 29 and is for a 4-year period, below the usual 5-year term. It is expected other leading banks will also follow suit.

While depending on their credit history, mortgagors are able to bargain a better rate from any bank, the rates posted by a bank are considered to be the standard for its mortgage offers. In fact, the reduced rates of mortgage are a fall-out of a development wherein people investing in international bonds are eating into the unprecedented rates offered by Canadian banks, as they are normally considered to be safer compared to bonds offered in other countries.

According to John Andrew, realty expert at Queens University, considering that the decline in mortgage rate has been trailing behind yields from bonds, this is not surprising. Moreover it is being propelled by worldwide economic uncertainty.

Previously, BMO could sell 5-year bonds worth $1.5 billion at 2.544%, while the Italian government could only sell bond offerings at a rate of 4.83%. Therefore, the BMO offer is considered to be a better bet than the Italian offer in the bond market, because a lower profit means the investors' confidence is more in the ability of the lender to achieve the loan terms.

The Mortgage Groups Mark Kerzner said that currently Canada reflects happenings in the international environment and the consumers can now benefit from the commotion in the remaining world.

In effect, investors are running for safety with the disclosure of the debt crisis in the European market. In such a situation, Canada is being considered as a symbol of hope in the fiscal world and, hence, Canadian bond offerings are in high demand. Discounted loans have consecutively permitted the banks to find new clients through reduced interest rates.

Toronto-base mortgage broker Verico Mortgage For Less president Nick Mitskopoulos points to a risk premium saying, while the 3-to5-year loans are less expensive, their immediate costs have escalated, but not for long-term loans.

According to Mitskopoulos, other creditors will be struggling to match the rates offered by BMO and in a bid to compete, most of them will also cut their rates. He suggests that at this stage BMO may possibly achieve break-even level and expect to make profits from the new clients by means of credit lines.

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