The Real Cost of BMO’s “Low Rate” Mortgage!

Today’s big news is that BMO’s has brought back (Until March 28th) their “Low Rate” mortgage, and as they say on their own commercials “Some Conditions Apply” – That’s for sure!   The Terms are:

– 5 year fixed @ 2.99% (Our rate – 3.19% full featured!)

– 10 year fixed @ 3.99%.(Our rate is already lower! – 3.89% and full featured!)

The devil, as the always say, is in the details as these mortgages come with significant restrictions:

1.  A Lower Maximum Amortization – 25 years maximum versus at least 30 years elsewhere:

  • This hurts first time buyers, who need the best rate and the 30 year amortization to qualify!
  • We often advise clients to set the maximum amortization and increase their payments using the pre-payment allowance.  This practice allows for a fall-back to a lower payment if the client experiences income difficulties.  The restricted amortization and pre-payment ability (see below) mitigate this opportunity.

2. Less Lump-sum Pre-payment Ability – 10% maximum per year:

  • As opposed to 15% – 20% in the full featured Mortgages that we direct our clients to.

3. A Smaller Payment Increase Option – Up to 10%, once per year:

  • Again, 15% – 20% is standard in the full featured Mortgages that we direct our clients to.

4.  A Locked Term – Fully closed for 5 years unless you sell the property, refinance or early renew with BMO:

  • The average actual length of a 5 year mortgage term is approximately 3.2 years!  That is, the average 5 year fixed rate mortgage holder refinances or switches their mortgage after 3.2 years.  That’s not possible with these terms
  • Once captive with BMO, the refinance or early renewal rates that BMO offers are unlikely to be competitive in the industry!

A real example:

  • $250,000 mortgage, 25 year amortization, 2.99% (Restricted Terms) vs 3.19% (Full Featured Terms):
  • The monthly payments are only $25.79 more with the full featured rate!
  • The mortgage balance after 5 years is only $815.40 more with the full featured rate!

As always, we urge caution when clients are considering “Low Rate” or “No Frills” Mortgages, and ask that clients Contact Us for a frank discussion of the options and implications of each.