The Big Banks and mortgage lenders across Canada are happy to once again drop their rates as Finance Minster Jim Flaherty steps down.
First Amongst the Big Banks
Amongst the 5 big Canadian banks, BMO is first to return to the enticing 2.99% for a 5 year fixed mortgage. Some stipulate and even expect that other banks will follow and match/better BMO’s offer. But is it really a comparable product?
What’s the Catch?
This rate is only available for mortgages with amortization up to 25 years regardless of how much you are putting down. If you are looking at reducing payments and you are putting 20% or more down, this may not be the best option for you. 5 years off of your amortization means you pay less interest and have a smaller mortgage outstanding at the end of the 5 years. However, for many first time homebuyers who are tight on a budget this could mean a higher payment. On an average $350 000 mortgage with the same interest rate and 20% down, payments would be approximately $200 higher monthly on a 25 year amortization vs. a 30 year amortization.
BMO is cleverly advertising this amortization as a way for the client to “pay off the mortgage sooner” but are contracting themself by offering lower pre payment privileges. On their other mortgages a client has 20/20 pre payment privileges. This means they can contribute up to 20% of their total mortgage as a lump sump and increase their payments by 20% on an annual basis. On this low rate mortgage, BMO is offering 10/10 prepayment privilege per year. (Not exactly helping you pay off your mortgage sooner)
Biggest eye opener is that you cannot get out of this mortgage unless you sell the property or refinance with BMO. BMO like other big banks will use an IRD to calculate their penalty should the client wish to get out of their mortgage early. Some industry professionals claim that their clients with BMO paid the highest penalties to get out, even higher than other banks.
Will Other Banks Follow?
Industry professionals think that there is a good chance that other banks will follow and perhaps even offer a better product with less “hassles.” So far, other banks have not followed as the do not think it’s a comparable product but only time will tell. Like everything in life, there is always a catch. Make sure you understand the fine print before you sign away. It could end up costing you a lot more than what 0.05-0.1% rate reduction can save you.