But what if interest rates go down?

Everybody thinks interest rates have nowhere to go but up. What if they can go down?

Bank of Canada governor Mark Carney signalled Tuesday he is still looking to raise borrowing costs "over time." Well, time must really stand still for Mr. Carney because this threat never moves to action and for the past three years the overnight lending rate has remained unchanged at 1%.

But that doesn't mean rates charged by some lenders couldn't drop below the current record lows, says Rob Mc-Lister, editor of Canadian Mortgage Trends. "There is no question rates can go potentially lower," he said. "We are very slowly seeing spreads tighten."

The prime rate tracks the overnight lending rate but that doesn't mean discounting can't get a little bit sweeter, especially when you consider mortgage brokers are willing to eat into their commission to buy down the rate as they compete with banks that are increasingly going it alone to reach consumers.

Mr. McLister said there are plenty of five-year, fixed-rate closed mortgages at 2.99%.

Those five-year contracts track the Government of Canada five-year bond and it yields about 1.4%. That leaves a spread of 160 basis points, certainly not the skinniest margin the banks have ever faced.

Mr. McLister said the discounting is largely a function of sales drying up in the real estate sector. He also thinks bond yields could keep going down and he points to "a whole host of industrial counties with five-year yields under 1%."

Canada could join them.

"Housing activity is expected to decline from historically high levels, while the household debt burden is expected to rise further before stabilizing by the end of the projection horizon," the Bank of Canada said in a statement Tuesday.

We didn't need the Bank of Canada to tell us that or that consumers are already tapped out. In the second quarter of this year, the debt-to-income ratio rose to a record 163.4% from 161.8% in the previous quarter.

Housing sales across the country have been dropping and the debate now is whether prices will soon fall.

Toronto builders added their voice to the chorus this week as they complained of new mortgage rules dragging down sales, which were off 23% over the first nine months of the year compared with a year earlier.

So the banks are increasingly going to be fighting for a smaller share of the pie.

Kelvin Mangaroo, president of ratesupermarket.ca, says variable rates tied to prime are already being discounted more heavily. Instead of 2.90%, based on the 3% prime rate at most banks, he has seen one of the big banks offering 2.55% on a five-year term.

He runs a rate panel discussion online every month and he wondered out loud recently whether the fiscal year-end for the banks might lead to some aggressive pricing before October is up.

"A couple of people on the panel wondered whether we'll see that," Mr. Mangaroo said about pricing cuts in the next week.

Not everybody is convinced there is much room for rates to go down. "I think lenders are preserving their yields. They won't take rates further down," said Vince Gaetano, a principal at monstermortgage.ca, adding banks will try to make more profit with bigger yields to compensate for the shrinking sales.

Elton Ash, regional executive vice-president of Re/Max of Western Canada, doesn't think a rate cut would do much for the market anyway.

"The bigger change has been the tightening of the rules and the shorter amortizations," Mr. Ash said.

Among the changes imposed by the government was the shortening of the length of mortgage amortizations from 30 years to 25 years, which has had the effect of increasing monthly payments while also decreasing how much loan a consumer can qualify for.

Some analysts have suggested the change was equivalent to a one-percentage-point increase in rates.

Benjamin Tal, deputy chief economist at CIBC World Markets, says rates could nudge down a bit on the long end, even though he thinks bank profits are probably squeezed close to the limit. But he also believes it wouldn't mean much to the market.

"We have been at low interest rates for a long period of time. It's just not as exciting, what's another 10 basis points," Mr. Tal said.

It's probably not enough to entice the consumer to take on more debt, which would probably please Mr. Carney.


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