BMO fired the opening salvo in a mortgage rate war this week by offering a 5-year fixed rate of 2.99 per cent, the lowest 5-year rate in modern Canadian history. Friday, other banks starting striking back, with TD and RBC cutting 4-year rates to 2.99 per cent.

Experts say other banks are likely to follow suit, with homebuyers being the clear winners.

“In the near term, mortgage rates are on sale, and that’s great news if you’re looking,” said Robert McLister, editor of the Canadian Mortgage Trends newsletter. McLister noted that even some 10-year rates are dropping.

“We’re seeing some lenders drop their 10-year rates to 3.89 per cent, which is only 70 basis points above their 5-year fixed. That kind of spread will be tempting to a lot of people,” said McLister.

While some customers might cheer the new rates, McLister wonders what took the banks so long.

“If you look at what’s been happening on the bond market, lenders have had the ability to do this for a few months, but nobody really broke ranks until this week,” said McLister. “Nobody’s really been pricing more aggressively than they had to.”

Banks are getting even more competitive than usual because they’re worried the mortgage market won’t be growing as fast as it has over the last few years, says Brian Klock, a banking analyst at Keefe, Bruyette & Woods.

“If there’s a limited supply of new mortgages coming on to the market, you want to make sure your share is as big as possible,” said Klock, pointing out the Canadian residential mortgage market grew from $729 billion in 2006 to more than $1 trillion last year. That growth came as people got their jobs back after the last recession. With unemployment now on the rise, that will likely slow down demand for housing and mortgages.

Still, even a competitor tipped his hat to the low rate.

“If you’re satisfied with everything else, take it, because 2.99 for 5-year money is a great rate,” said Peter Aceto, president and CEO of ING Direct. “I had some of the people here look into it, and it’s definitely the lowest they’ve been able to find for as far back as it’s been tracked.”

Aceto cautioned, however, that the devil is in the details. Ultra low rate mortgages usually offer less flexibility. In BMO’s case, there’s a Jan. 25 application deadline for the special rate, and it offers limited ability to pay off the mortgage early.

TD Bank dropped its 4-year fixed rate to 2.99 per cent Friday, and took a not-so-veiled shot at BMO in the process. Unlike BMO’s deep discount rate, TD’s 2.99 offers the same early payment flexibility as its standard 5-year mortgage.

“You don’t give up any flexibility at all to get this great rate,” said Farhaneh Haque, TD’s director of mortgage advice. TD’s deadline is February 29.

Aceto said ING has no plans to match the 2.99 rate.

“It doesn’t matter what day you call us, we’re going to give you our lowest rate,” said Aceto, who called the 2.99 rate “unsustainable” from a bank’s point of view.

“I can’t imagine in the profitability structure, that that’d make sense. I think 2.99 is unsustainable. . . . It’s not in anyone’s interest, except the customer,” Aceto said.

If you’ve already got a mortgage and are tempted to refinance to take advantage of the deep discounts on offer, Haque and McLister say it’s crucial to crunch the numbers first. Just because 2.99 is lower than your current rate, doesn’t mean it’s a smart financial move to change.

“There really is no one set answer that fits everybody. You have to find out what the penalties are for breaking your current mortgage. You have to do the math,” said Haque.