Barely two months after the fires were put out, BMO has reignited the cooling embers of the mortgage war among Canada’s largest banks.

The bank announced, effective today, it is dropping the interest rates on a five-year mortgage to a historic 2.99%, a reduction of 50 basis points on the existing rate. The rate on 10-year mortgage has also been slashed to 3.99%. Both the five-year and 10-year rates carry a 25-year amortization period.

Residential mortgages make up a large part of banks’ balance sheets. The tough economic environment, spiralling household debt, stiffer lending requirements and speculation about an imminent crash in the housing market are forcing banks to use unconventional tools as they aggressively compete for marketshare.

“At BMO, we believe the housing market is poised for a soft landing,” said Techer. “Canadians can help ensure this outcome by choosing a shorter amortization and not overextending themselves, which we believe will have a moderating influence on housing prices.”

On a $400,000 mortgage at a 5% interest rate, moving from a 30-year to a 25-year amortization can save upwards of $70,000 in interest, which Canadians can put directly towards their retirement.

It is, however, argued that lower mortgage rates create a false sense of affordability and encourage consumers to take on more debt thereby worsening the problem of excessive borrowing.

In a speedy reaction to BMO’s mortgage challenge, TD Canada Trust is offering a four-year special mortgage fixed interest rate of 2.99%, effective March 9.

“With all the available special offers in the market, consumers may be tempted by simply choosing the lowest rate,” said Farhaneh Haque, director, mortgage advice, TD Canada Trust. “However, for many customers, the best mortgage offer may be the one that recognizes that life isn’t always predictable and that provides them with flexibility to accommodate their circumstances.”

Customers are urged to not only choose a low interest rate, but to consider that flexible mortgage payment features will allow them to pay their mortgage ahead of schedule.

“Many of our customers are serious about paying off their mortgage as soon as they can, in fact, nearly half of our customers are ahead of scheduled payments,” added Haque. “TD is committed to making it easy for customers to do so and that’s one reason why we offer flexible features as well as affordable rates.”

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