Home Buyers Face Risk on Longer Loans, BMO’s Downe Says

Bank of Montreal (BMO) Chief Executive Officer William Downe said the trend toward longer amortizations coupled with low interest rates on mortgages is causing “risk” to borrowers.

“In the current low-interest rate environment, there is risk to borrowers, given the national trend toward longer amortization periods,” Downe said today in a speech at the bank’s annual general meeting in Halifax. “It is for this reason we are emphasizing a 25-year amortization with a 5-year or 10-year fixed interest rate.”

Bank of Montreal announced March 7 that it was offering a new 10-year fixed-rate mortgage for 3.99 percent, effective March 11, and lowering one of its five-year fixed-rate mortgages by 50 basis points to 2.99 percent. The mortgage rates, which carry a 25-year amortization are available until March 28.

The Toronto-based lender has prompted mortgage cuts among rivals on the offers. The lower rate of these mortgages aims to draw attention to 25-year amortizations as an alternative to longer amortization periods.

“The logic is this: With a shorter amortization, homeowners are able to build equity faster and have the confidence of knowing what their monthly payments will be, no matter where interest rates go in the future,” Downe said.

Downe also reiterated his expectations that Canada’s housing market is heading for a “soft landing.”

“We took a long, hard look at the Canadian housing market and concluded, on the one hand, there was a legitimate concern that housing prices -- particularly in the largest cities -- had been rising at a rate that was simply unsustainable,” Downe said. “With growing concerns over household debt, a soft landing in housing is in the best interest of our customers and the national economy.”

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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