Demise of the discount mortgage?

forsaleresizedPosted mortgage rates inched up this week, stoking fears of softer housing sales and the squeezing of over-indebted home owners.  But some observers question whether those fears are as worrisome as they appear, given that actual rates negotiated by home buyers are lower than what’s being  advertised by the banks.

On Thursday, Canada’s large banks followed the lead of BMO, Bank of Montreal, which upped its advertised, five-year fixed rate to 3.79 per cent this week. BMO, of course, is the bank that triggered a mortgage war earlier this year, when the bank lowered its advertised rate to 2.99 per cent.

It’s the latest hike by the big banks, which raised rates three times in June. While some bank analysts say the hikes signal the demise of the discount mortgage, developers and brokers point out that buyers are still negotiating lower rates in private.

“Posted rates have become meaningless,” said one Montreal developer.  “BMO still quietly offers much less. “

To  avoid the higher fixed rates, customers also appear to be changing the way do business. Since the series of rate hikes in June, more customers are now taking variable mortgages, which continue to be offered at sub prime rates (below the Bank of Canada’s three per cent overnight rate), said BMO mortgage specialist Brad Weigensberg.

“Up until September 2011, the 2010-2011 mortgage market was 75 per cent variable and 25 per cent fixed,” Weigensberg told me in an email. “In 2012 until mid June 2013 the mortgage market was 99.9 per cent fixed,” with the vast majority being five-year fixed rates, he added. Since June, BMO has returned to a 50-50 variable market, he said.

“With a potential difference of 0.75 per cent or more, the market will continue to push more to the variable side with economists not seeing an increase in the overnight rate until mid 2015 at the earliest,” he said. @RealDealMtl

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