Homework

On Thursday the Bank of Montreal (BMO) announced that it was reducing the annual interest rate on their 5-year fixed-rate mortgage to 2.99%, the lowest in the banks history. Shortly after the BMOs announcement, TD-Canada Trust issued a news-release to inform the markets that they, too, would be offering that low interest rate, followed shortly after with the same offer coming from the Royal Bank (RBC), Scotiabank and the CIBC.

Those low interest rates were being offered at a time when many financial experts, including the governor of the Bank of Canada, and the federal Minister of Finance had been warning all Canadians about the dangers of borrowing money, especially money that is being offered at very low interest rates.

Here we are, again, a bit more than one year later, and history is repeating itself, with the BMO and Manulife Insurance offering the cheapest rates on the street. This is not surprising, because March is usually the beginning of the spring home-buying season when people begin to look at buying either their first home or are considering trading up to a better home.

Question

Why are banks, and other lenders, able to provide consumers with offers such these low-rate loans in todays market?