By: Kiyoko Fujimura

The Bank of Montreal announced yesterday that they would be dropping their five-year fixed mortgage rate to 2.99 per cent, the lowest rate offered by a chartered bank in Canada — ever.

It comes with a couple of hitches though. “[L]ump sum payments are limited to 10 per cent of the principal each year. The mortgage is also based on a 25-year amortization period.” (CBC News)

Some of you might be wondering, “So who can I thank for this incredible deal?!” While the immediate answer might be, “Why the good people at BMO, of course!”, I would say that the answer goes a bit deeper than that. You know who I’d thank? Europe.

Fixed mortgage rates are largely determined by the bond market and, right now, international investors are struggling to find safe places for their money. In the eyes of the international finance community, Canada is one of the safest places on the planet. So investors are pouring money into Canadian bank bonds.In doing so, they put downward pressure on interest rates.

Essentially, because the demand for their bonds has increased, the banks don’t have to pay as much interest. Imagine if everyone wanted to give you a loan — you would be able to negotiate a lower interest rate. With access to even cheaper credit, the banks can pass along those savings to their customers (and, of course, compete more intensely with other banks) in the form of lower fixed mortgage rates.

So if you’re a first-time home buyer or looking to renew your mortgage this is probably great news. But if you’re just a real estate market news junkie, then you might be wondering: What does this mean for the market in the long-run?

Well, there’s something unsettling about this. Remember our infographic that showed the predictions of the Canadian housing bubble? The whole question of whether or not there’s a bubble is basically unresolvable until the creditworthiness of Canadian mortgage holders is tested. And the test? Basically, interest rates have to rise which, by most predictions, won’t happen until 2013 or even later.

For now, I suppose this is a good news story. But if there is an issue in the Canadian housing market, these “playing-it-safe” international investors are just exacerbating the problem — and making a quick buck in the meantime.

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