MORTGAGE: Rates as low as 3%

The latest rate cut means consumers buying a house can borrow for as little as 3% interest on their loan if they are willing to buy into the Bank of Canada's statement yesterday that it won't be changing rates until June, 2010.

If you don't believe the bank will hold steady on its promise, you can lock into five-year, fixed-rate mortgages for as low as 3.85% on a discounted basis -- the lowest rate in Canadian history.

But all of that may amount to nothing when it comes to soothing a Canadian housing market in which housing starts have fallen below 200,000 on an annualized basis for the first time in seven years. March existing-home sales were off 13.7% from a year ago.

"Wh a t is 25 basis points among friends? It's really nothing," said Benjamin Tal, senior economist with CIBC World Markets.

"This is not something that is going to change the course of the market. It only helps at the mar-gin."

Mr. Tal said mortgage refinancings are up dramatically in the past few months as Canadians who might have borrowed at 5.75% two years ago are ready to eat any interest rate penalty because a five-year rate mortgage is now so low.

The penalty to break an existing mortgage is the greater of three months' interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.

Mr. Tal said while there is not much lower for variable-rate mortgages to go, the gap between short-term money and long-term money is still significant enough that the temptation is not to lock in.

"You might do better the first two years [of a five-year mortgage] but not the remaining three. I'm convinced longterm interest rates will rise. I can see [long-term rates] rising 200 basis points. These are emergency rates and at some point this emergency will end," the economist said.

John Turner, director of mortgages at Bank of Montreal, said he's never seen anything like what is going on in today's market.

"There is a possibility of another drop," Mr. Turner said. "But does your tummy feel good about something that has a higher possibility of going up than going down any further?"

He is convinced these lower rates will boost the housing market. The 13.7% drop in home sales in March was the smallest year-over-year decline in six months.

Don Lawby, chief executive of Century 21 Canada, said while rates are declining, banks are getting tighter with how they hand out credit.

"If you are self-employed, the banks are demanding more documentation. Appraisals are getting harder, too. It's not what you bought the house for but what it's appraised for," said Mr. Lawby, who also heads up a mortgage brokerage. "There is not a lot of subprime out there for people with any credit problems in their history."

"Mortgage rates as low as 3%" prepared by Garry Marr/Financial Post)