March 20, 2012 / 5:22 PM / 6 years ago

REFILE-BMO CEO defends cheap 2.99 pct Canada mortgages

* Cheap loans come as housing-bubble worries heighten

* CEO says 25-year amortizations protect customers

* Canada’s No. 4 bank first to offer 2.99 pct loans

March 20 (Reuters) - Bank of Montreal’s record-low mortgage offers should help customers get out of debt faster, the bank’s CEO said on Tuesday, playing down concerns that the 2.99 percent loans will spur unwise borrowing by already heavily indebted Canadians.

BMO, Canada’s No. 4 bank, has been criticized for unveiling the cheap loans at a time when Canadian consumers are dealing with record high debt levels and when housing prices are seen to be nearing bubble territory.

BMO Chief Executive Bill Downe acknowledged that the trend of low rate loans with longer amortizations presents a risk for borrowers if rates rise, but he noted BMO’s low-rate offers are for a 25-year amortization only, rather than longer terms being offered by competitors.

“With a shorter amortization, homeowners are able to build equity faster and have the confidence of knowing what their monthly payments will be, no matter where interest rates go in the future,” he said in a speech to the bank’s annual general meeting in Halifax.

BMO first offered the 2.99 percent, five-year mortgage during a two-week window in January and then again two weeks ago, this time adding a 10-year mortgage at 3.99 percent. Both times, rival banks quickly cut mortgage rates to match BMO’s 2.99 percent offer.

Bond yields have been creeping higher since last fall, and have rocketed higher in March, meaning that funding costs for the banks are also rising.

Downe said the low rate offer in January generated a “significant volume” of new business for the bank, more than half from customers who did not have mortgages with BMO.

Canada’s banking regulator on Monday released draft guidelines calling for lenders to be more t ransparent about their mortgage businesses as the watchdog seeks to m inimize the risk to the economy from high levels of household debt.

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