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Scotiabank lowers its fixed five-year mortgage rate to 2.97 per cent

TORONTO - Scotiabank (TSX:BNS) is the latest lender to create waves in the mortgage market after lowering its special fixed five-year rate to 2.97 per cent, the lowest fixed rate among the big banks.

The rate is effective until June 7, and comes amid growing competition for mortgages that have pushed rates down in recent months.

It's also below the 2.99 per cent level that drew sharp criticism from Ottawa in the past over fears that such rates could overheat the housing market and encourage buyers to borrow too much.

However, Scotiabank says the rate is on par with others in the market.

David Stafford, Scotiabank's managing director of real estate secured lending, said the trick is to use the low rates to your advantage because they won't last forever.

"Our best advice to people renewing from a higher-rate mortgage is don't change your payment," he said.

"If you have a four per cent mortgage and you're up for renewal and you're renewing into a three per cent mortgage and your payment isn't killing you, keep the payment because the interest cost to your mortgage will drop but the additional payment will all go to principal."

The special five-year rate doesn't come with the strict restrictions that usually accompany such low rates, he added, so that borrowers can have the flexibility they'll need if their circumstances change.

John Andrew, a real estate expert with Queen's University, said it was likely that other banks would follow Scotiabank's lead to keep in pace in a competitive market — especially given a lag in sales in the all-important spring market which was delayed by bad winter weather.

"There's no question that the mortgage lenders are very concerned about this slow spring and are obviously trying to catalyze the market and it's obviously even more competitive right now than it normally would be," Andrew said.

"We're looking at mortgage rates very, very, close to this level being predominant right into the fall, and then I think we're going to see bond yields begin to creep up again and we'll start to see some rates rising."

Finance Minister Joe Oliver has said in the past that unlike his predecessor Jim Flaherty, he had no plans to wade into the debate over the setting of mortgage rates, calling it a "private" decision by lenders. But he has signalled he would keep an eye on the changes, noting that Ottawa has intervened in the past.

On Wednesday, he called the Scotiabank change a small drop in rates and restated he wasn't planning to get involved.

"It's a tiny difference and we're not here to determine mortgage rates for the industry," Oliver said in Ottawa.

Andrew said he wouldn't expect a big crackdown from the federal government if rates continue to drop, because at this point, Ottawa is "a little bit handcuffed."

"There's not a lot else they can do, unless they decide to increase the minimum down payment from five per cent, and rightfully so, I think they're quite scared to do that because that would have a huge impact on first time home buyers (and) in the home building industry and mortgage lending and so on," he said.

Investors Group recently offered a 1.99 per cent rate for a 36-month closed, variable-rate mortgage, but Scotiabank is the first of the big banks to push its fixed rate down below three per cent in recent months.

As part of its special rates, Scotiabank is also offering a five-year variable rate of 2.47 per cent.

Rating agency DBRS published a report Wednesday saying that low and stable interest rates are the largest factor driving increasing levels of household debt and decreasing mortgage debt servicing. It found that mortgage debt servicing fell to 3.7 per cent, the lowest level since record keeping started in 1990.

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Note to readers: This is a corrected story. An earlier version had an incorrect figure for the level of mortgage debt servicing.

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