Mortgage rates dropped by 2 Canadian banks

Two Canadian banks did their bit to unclog the country's constricted housing market Wednesday by cutting mortgage rates.

The Royal Bank of Canada and the Bank of Montreal both chopped borrowing costs for people seeking to buy a home.

RBC cut its mortgage rates by one-quarter of a percentage point for most of its loans with terms ranging from six months to 25 years.

The exceptions were the one-year closed and four-year closed mortgages. Both of those products saw their rates slashed by three-quarters of a percentage point. The one-year vehicle now costs 5.60 per cent while the four-year mortgage rate is 6.29 per cent.

BMO marched down a similar path but at a different pace.

A three-year variable-rate mortgage from the chartered bank now has an interest rate 50 basis points lower at 5.0 per cent.

In its biggest move, BMO knocked the rate on its one-year fixed closed mortgage by 1.05 per cent to 5.60 per cent. The only three-year mortgage making the RBC list was closed, with an interest rate of 6.45 per cent.

Interest rates have been falling as central banks cut prime lending charges and pumped trillions into the global financial system in an effort to get lenders lending and borrowers borrowing once again.

To some degree, rates have fallen as the financial crisis gained momentum.

According to the Bank of Canada, a one-year conventional mortgage had an average interest rate over the past 20 months of 6.94 per cent. That compares with a current rate for the same borrowing vehicle of 6.35 per cent.

In many cases, lenders try to match the terms of their lending with the conditions regarding the cash they in turn borrow to fund the mortgage.

Thus, to fund a five-year mortgage, a bank might issue a similar-length bond.

So the comparable rate for long-term mortgages might be the lengthier GIC or government of Canada bond. And these investment vehicles tend to have higher interest rates than GICs or bonds of a shorter duration.