13 Jan 2012

Facts behind BMO low 5yr fixed rates

Canadian news wires were aflame this morning with BMO’s latest announcement. A new mortgage product offering an unprecedented 2.99% 5 year fixed mortgage. WOW is right. The best 5 year fixed rate available today through various mortgage brokers and banks is an attractive 3.15%. To put this into perspective a $300,000 mortgage with a 5yr term at a rate of 3.15% amortized over 25yrs would result in $43,734.13 of interest paid (not including principal) while a 5yr 2.99% mortgage amortized over 25yrs would equal $41,466.39 a difference of $2267.74 over a 5 year period. That works out to $37.80/mth.

In my opinion the savings here are modest and the 2.99% rate is being used to simply get more warm bodies through the doors of BMO branches.  It seems there are many restrictions placed on the 2.99% mortgage:

Mortgage can’t be broken early unless refinanced with BMO

This can be a problem if a competing lender is offering a more attractive product. You would be trapped in a 5yr term with unfavourable terms without the option to transfer your mortgage to another lender.

Amortizations can’t exceed 25 years

Of course a shorter amortization is ideal as it results in quicker payment of principal building more equity in your home but for the first time buyer the monthly payment may exceed affordability vs a 30 or 35yr amortization at a more attractive rate.

Reduced prepayment options – 10% and 10%

This means that you are allowed an annual prepayment of 10% towards your principal and an annual 10% increase of your monthly mortgage payment to help pay down your principal at an accelerated rate. If your goal is to pay down your mortgage as quick as possible this restriction from BMO can get in the way of your goal. A traditional mortgage at a very competitive 3.15% would allow for an annual prepayment of up to 20% directly towards your principal potentially saving you thousands in interest by the end of your mortgage term as well as an annual 20% increase in your monthly mortgage payment. This point alone negates the short term benefit of the 2.99% rate.

Only for owner-occupied properties

Simply means that the 2.99% cannot be applied to investment properties. This rate is reserved for your primary residence.

Can’t be used with their line of credit product

Many homeowners have been able to take advantage of low rates to finance home renovation projects by combining their low interest mortgages with lines of credit (LOC’s) that increase as your principal is paid down. With this new BMO rate you cannot combine this attractive rate with a LOC. If you require a LOC you will have to apply for a separate product subject to higher rates.

Limited time special

All applications need to be submitted on or before Jan 25th, 2012. One thing to consider is that BMO traditionally offers shorter rate holds. Meaning, if you submit your application on Jan 25th your 2.99% rate would only be held for you for 90 days vs. Up to 120 days with other lender. This would mean that you now have 90 days to find a property, buy and move in. Most buyers would appreciate the longer rate hold.

As is often the case it’s a bit ‘too good to be true’.  Teaser rates are often used to lure uneducated customers into terms which will end up favouring the lender.  Our best advice is to consult with a mortgage broker who can educate you on all the relevant terms of a mortgage contract.  For more information and current rates contact the Spring Realty Mortgage Expert; Lee Welbanks – Mortgage Broker with The Mortgage Centre

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