BMO’s No-Frills 2.99% mortgage offer is not ground breaking…just another trap by the Big Banks.
|Posted by Jeff Trounsell (jefftrounsell) on Jan 18 2012|
|Blog >> January 2012|
EXTRA, EXTRA, READ ALL ABOUT IT…. 5 years fixed No-Frills mortgage for 2.99% by BMO….wow, can you believe it? Well, don’t get too excited… At CanadaMortgageNews.ca we give you the straight talk… and guess what, No-Frills mortgages aren’t anything new…
I’m giving a BIG THUMBS DOWNS to this product… and you should too…
I’ve had access to these products in the past and we still have access to them…. but I have NEVER recommended it to any of my clients…. the limitations can be too costly and any potential savings can easily be eaten away with prepayment penalties, fees and the inability to even exit the mortgage…. That’s right, you can’t exit the mortgage in many cases… read on, I’ll explain more..
Make sure you understand how the rates are calculated
Before you start thanking BMO and putting your arm around the banker’s back, you should understand that rates have been inflated for several months… they should actually be much lower…..
Fixed mortgage rates are closely priced to the Govt of Cda bond yields. 5 year Bond yields have been below 1.50% since Nov 1….and have been hovering at around 1.30% since Dec 1. Historically, the best discounted rates are between 1.25% and 1.50% above the bond yields…. That means fixed rates should be at around 2.80%…. Okay, let’s add in a premium for some market uncertainty…. That doesn’t explain why 5 yr Fixed mortgage rates have not been below 3.29%?
Well, I think Canadians are smart enough to know why the savings hasn’t been passed down to them…. yup, Banks are just maximizing their profits… And now, this past week, we saw an announcement that BMO was announcing a special low rate… 5 years fixed for 2.99% … WOW, that does sound great…doesn’t it? Well, maybe not… let’s take a closer look before giving this product the ‘thumbs up’.
A closer look at BMO’s NO-Frills 2.99% special
There are too many limitations to this product…
-maximum amortization is 25 years. your prepayment privileges is reduced to and annual lump sum payment of 10% of the original principal balance and you can only increase your payment by 10%.
-90 day rate hold instead of the usual 120 day rate hold.
-you cannot payout this mortgage prior to maturity unless through a bona fide sale…
-you can only refinance the mortgage with BMO and not with any other lender before maturity…. this will all but eliminate your ability to negotiate the rate… a huge loss for borrowers…. ( you can take your mortgage with you if you move to another house but if you need more money, you will have to negotiate the rate… do you really think BMO will give you the best rate at that time???).
-BMO’s penalty calculation… the BIG SIX banks have the worst penalty calculation formula in Canada. This is one of the biggest kept secrets in the industry… If you had to pay your mortgage early, for any reason.. or if you had to refinance, you would be hit with a penalty calculation that could break your savings account… That’s because the BIG SIX banks use a formula that makes you pay for your mortgage discount, for the entire term of the mortgage… read this article on how they do it…. don’t get caught having to pay a 10, 12, 14 month interest penalty…. (just worked out a mortgage penalty for a client.. if they stayed with RBC, they would have to pay a penalty of $7,000, if they went with one of our wholesale lenders, they would only pay $2,000. this penalty calculating formula is similar to BMO).
By the way, the competition has responded and bettered BMO’s offer
There is some good news to BMO coming out with this product… just as we are writing this, we see that a big lender has come out with a 4 year fixed rate of 2.99% with NO restrictions or limitations… For us, that eliminates BMO’s Low rate special as a serious competitor in the mortgage market. But thank you, BMO, for pushing the Lenders…
My advice, stay away from these No Frills mortgage… speak with your mortgage broker and get full disclosure on this and other products before making any decisions that could end up costing you dearly…