Sub 3% mortgage rates are in sight again — just don’t tell Jim Flaherty

Perhaps they forgot to consult Jim Flaherty, but mortgage brokers appear to have crossed the line in the sand he drew for how low rates should go.

Rates from some mortgage brokers on five-year fixed rate loans have dipped below 2.99% — a level the finance minister was so unhappy to see in the past he contacted banks that made that offer and warned them to stop getting into mortgage rate wars.

But bond investors have a mind of their own and have been sending the rate on the Government of Canada’s five-year bond — which consumer mortgage rates are based on — down as low as 1.55% Monday.

“It’s starting to look a little bit like March 2012, when Bank of Montreal offered their very low rate,” said Kelvin Mangaroo, president of ratesupermarket.ca, remembering the financial institution’s 2.99% rate for a five-year mortgage which was soon matched by others.

Mr. Mangaroo noted the major banks did drop their rates last month but even with the reduction Bank of Nova Scotia is the lowest on a five-year fixed mortgage at 3.49%, leaving plenty of room for further declines.

“We have a couple of brokers offering this rate, it is not a case of brokers buying down the rate,” said Mr. Mangaroo, referring to practice of brokers eating into their commission to produce a lower percentage. He couldn’t say who is providing the funding for the sub 3% mortgage.

“I think the economic news around the world is starting to make an impact,” said Mr. Mangaroo, adding it’s too early to see whether the banks will trade to match some of the rock bottom rates from brokers.

He noted based on the average Canadian mortgage of $378,000, the savings between 2.99% and 3.49% would amount to $100 per month.

The discounting could leave banks far more open to negotiating better deals with consumers in the coming months, especially if housing sales start to slide and they are competing for a piece of a smaller pie.

Last year was a pretty remarkable year for negotiating a good deal. The Canadian Association of Accredited Mortgage Professionals said the average five-year fixed rate mortgage was 3.06% in 2013, while the average posted rate was 5.21% in 2013 for the same term.

“We all know the posted rates don’t mean much,” said Jim Murphy, chief executive of CAAMP. “I have yet to see any public campaigns about 2.99%. We know it’s a competitive spring market and this is when all this came up the last time.”

Variable rates, which are tied to prime, have mostly remained constant because the Bank of Canada has not change its overnight lending in years. However, the posted rate, which variable rate borrowers must qualify off of, dropped in January from 5.34% to 5.24%.

All of this could mean further intervention into the housing market by Mr. Flaherty who has tightened mortgage rates on several occasions. Among the key moves during this housing cycle has been a shortening of amortization lengths from 40 years to 25 years.

Benjamin Tal, deputy chief economist with CIBC World Markets, says it’s probably too early for the finance minister to intervene.

“I don’t know if they will act as quickly,” said Mr. Tal, about tightening rules. “But nobody wants to see the housing market reheat.”

There is some risk rates could reignite the market but the economist thinks they have been rock bottom for so so long, lowering provides only so much impetus.

“But you know the housing market in Canada has nine lives, every time it’s supposed to slow down because of higher interest rates, something happens elsewhere to keep them low,” said Mr. Tal.

Prices continue to rise across the country. The Canadian Real Estate Association said December average prices were up 10.4% nationally from a year ago to $389,119.

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