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

So, while there are many people wanting to take advantage of these very low mortgage rates, others are (or should be) concerned about the potential dangers of getting a mortgage at a low interest rate.

1 a) explain the dangers of low interest rates (not just for mortgages, but for car loans, lines of credit, student loans, etc.). Again, think big picture.

b) explain what consumers should do before they sign-up for a low-interest-rate loan that will not have the interest rate fixed at that low rate for the entire duration (term) of the loan. In other words, what are the implications for potential borrowers, and what should they watch out for?