The 2.99% Mortgage: Too Good To Be True?

As promised, I’ve asked my mortgage broker, Joe Sammut, to weigh in on the mortgage debate we’re having on the blog this week.

There is a LOT of talk about BMO’s new 2.99%, five-year, fixed-rate mortgage, which doesn’t surprise me in the slightest.

But what does surprise me is that much of the general public is already aware that the mortgage comes with major restrictions and drawbacks!  People today are so well-informed, it’s truly amazing.

So to pick up Tuesday’s blog – about what features you want in a mortgage, I’ve asked Joe to write a piece on the BMO mortgage, and comment on which features are impacted.

BMO299

Too Good To Be True?
By: Joe Sammut
Mortgage Architects

Remember when your parents told you “if something seems too good to be true, it probably is”?  I believe that is pretty much the case with the BMO cut rate special mortgage currently available at 2.99%.

BMO and other lenders that have chosen to slash their rates are doing so to get a jump on the upcoming spring market and grab a bigger share.  This is creating expectations in the mortgage market of unrealistic rates with a product that could well become your worst mortgage nightmare.

What’s in it for Lenders to drop the rate so low, reducing their profitability to negligible at best?

I think that the profits may be found in the ancillary products that can be sold with the Mortgage: Life Insurance , Disability Insurance, Creditor Insurance, Wealth Management, GIC’s, Chequing/Savings accounts, etc.

Also, when you have no option to go elsewhere on renewal at the end of the first 5 year term, chances are you could be looking at posted rates at that time with no room for negotiation.

A March 25th email from a very trusted, experienced and educated Lender partner put it this way:

“Morning all, we have raised our 5 year rate to 3.25%. I thought I would share a quick reasoning behind this latest rate increase as I am aware other lenders have chosen to drop their rates.  5yr bonds went up to 1.74 yesterday, add to that a generally accepted spread of 1.60bps which covers overhead, payrolls, transaction fees and such and you can see rates should really be around 3.30 percent.  With the above numbers being the same for all lenders I can’t imagine it (2.99% on 5 year fixed mortgage) will last much longer, given the recent bond movement.”

As we know from past experience, rates can and do shift overnight.  But, while it’s available BMO will take a share of the market simply through the talk and media frenzy that surrounds this rate cut.

They will find their profits somewhere as they are in business to make money.

Don’t get me wrong, this isn’t just a BMO thing, other Lenders have chosen to follow suit, but for the purpose of this discussion we will examine the BMO offering.

If you’re not one to read the fine print, there are a number of restrictions in this mortgage that may not mean much at the time it’s put in place, but can make a world of difference if your situation changes.

Flexibility is an important part of any contract, but it comes at a price.  A lender looks for certainty that their money will be out there earning interest for a set period of time.  In the event that something changes and affects the lender’s earnings, there will be penalties to the borrower if these possible changes weren’t anticipated and accounted for ahead of time.

Let’s take a minute to examine those flexibility features and how they stand on the current BMO offering.

Pay up or increase a payment options allow you to increase your regular monthly payments by as much as 20% in a standard full feature mortgage.  BMO is allowing only a 10% increase.

Pay down or prepayment options allow you to make a lump sum payment to reduce the outstanding principal balance of your mortgage, again the standard is usually 20% but restricted to 10% with the BMO special.

Early repayment on most mortgages is as simple as paying off the existing mortgage.  Win the lottery, pay off the house.  Inherit money and pay off the house.  Sell the house to your kids and pay off the house.  There are many reasons that the time will come to pay off that mortgage.  There will be a penalty with every lender.

BMO has decided that full early repayment is only possible in the event you sell your house to someone not related to you (an arm’s length transaction).  Take a look at the penalties for this allowable repayment.  I can guarantee you they will be sizable and force you to think twice about selling your home prior to maturity.

What about affordability?  A conventional mortgage can be had with many lenders with a 30 year amortization.  This allows you to opt for a lower monthly payment, add in the 20% payment increase feature when you have the ability and you are paying that mortgage off knowing you can revert back to the lower monthly payment if life throw’s a curve ball.  Keep this in mind if you’re considering a strip-down rate special offer.  This is one of those “perks” that has been removed.

This brings us to the ability to renew or refinance this mortgage.  Let’s call it the handcuffs!

Should you decide to take equity out of the home for whatever reason…university tuition for kids, purchase of a second home or cottage, you will want the flexibility to shop.  Imagine only being able to shop at one grocery store or one car dealership.  When you remove the ability to shop and compare, you are at the mercy of whatever price or features the store or dealership choose to offer you.

That is the situation with the BMO special rate mortgage.  Refinancing and renewing can only be to another BMO product at whatever price they set at the time.  What if they change the qualifying criteria or choose to do away with features and benefits that you may need at that time?  You’re stuck!

So what is so special about the rate special? Yes there is a savings if you are not interested in utilizing the best available features to pay that mortgage off faster and you never plan to shop around for a great rate on renewal and you’re certain that life won’t throw any surprises at you for the next 25 years.

Doesn’t sound so special now, right?

As a quick comparison, please consider today’s five year fixed rate of 3.09% vs 2.99% special rate*, mortgage amount of $640,000 (80% of a purchase price of $800,000).  To demonstrate affordability, I have also included 30 year amortization at 3.09% which is not available with the rate special.

5 year fixed term at 2.99%                5 year fixed term at 3.09%                5 year fixed term at 3.09%

25 year amortization                            25 year amortization                       30 year amortization

Mortgage Amount $640,000             Mortgage amount $640,000           Mortgage Amount: $640,000

Monthly payment $3,025.49             Monthly payment $3,058.40           Monthly payment $2,722.59

3.09% is widely available through many lenders today and comes with more possible flexible features and benefits such as portability to another property, higher prepayment privileges, penalty free options at renewal and more.

The choices are many with an increase of 10 bps.

The difference is $32.91 a month.

In light of the potential posted rates at renewal and severely restrictive conditions of the lower rate mortgage, this seems to be a reasonable amount of increased monthly payment to add in the flexibility to meet life’s changes.

There are alternatives…take five minutes out of your day to have a conversation with a Mortgage Broker.  An educated broker can offer you many choices that can bring your rate at or near these “special rates” with full features and benefits to suit your needs if you qualify for them.  Choices and flexibility are what will truly save you money in the long run.

Thank you to David for allowing me to share my thoughts on Toronto Realty Blog!

Joe Sammut
Mortgage Broker
Mortgage Architects #10287
(888) 575-4403 x23
joesammut@mortgagegate.ca
www.mortgagegate.ca
*oac and E.O.& E.
*Rates are subject to change

 

10 Comments

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  1. Joe Sammut says:

    Thank you Nancie!

  2. nancie says:

    Thanks Joe for the well written article. I have trouble with fine print!

  3. Paully says:

    It is always important to consider the source of the information and determine if there are any other factors that might be skewing the opinion offered. Specifically, I am referring in this case to the compensation that a Mortgage Broker would receive from the bank.

    David, how much less, on a percentage basis, is BMO willing to pay the broker for placing a client into the 2.99% special rather than a regular program rate mortgage?

    Please note, that I am not saying that Joe’s opinion is affected by the compensation rate, but it is wise to know if that could be a factor in any opinion offered.

    1. Joe Sammut says:

      Paully,
      Good observations. Thank you for opening up the discussion.

      As a broker, we get paid on mortgage amount and term, not on rate. There is no benefit to us by convincing a client to pay a higher interest rate. This information is always part of our initial conversation with a potential client.

      Also, BMO does not work with Mortgage Brokers at this time, they use their own sales force and branch locations. Having said that, there are other lenders offering this restrictive product who do work directly through Brokers and it is still not a product that I would place a client with for all the reasons I mentioned in the blog.

  4. IanC says:

    That’s a great summary.

    I also think it is helpful to see at a glance how much interest you are paying out total for the whole term. The monthly numbers are most important, but multiplied by 60 is what it’s going to cost you.

    If the difference between 3.05 and 3.10 works to a thousand bucks over the whole term, you can match that against the different benefits you outlined or any fees not absorbed by new lenders if you are switching.

    No two mortgages are exactly the same. I’m up for renewal, and my current TD allowed double regular payments and 15% annual (i.e. 15/100) but it depends how much a benefit could be worth to the individual. Each borrower is more different than each mortgage.

    1. Daniel says:

      This is a really great point. While almost all brokerage situations involve a conflict of interest (wealth managers, real estate agents, insurance brokers) the mortgage broker game seems to be one of the worst. I’ve been told the spreads vary dramatically. It would be great to get a picture of what a typical mortgage broker would see as compensation across a range of mortgage products.

      As an aside, i just bought a house and shopped for insurance through a broker for house and auto combined. The broker came back with rates that were literally twice what i was able to get after 45 minutes calling insurers on my own – eesh.

  5. Schmidtz says:

    The banks are, what I would call, shitty.

    This is a poke to Joe Oliver.

  6. LJay says:

    Question: Sorry if I am just not understanding this, but is it correct that after your 5 years at 2.99%, you HAVE to stick with BMO? You are not just free to go with whichever lender offers you the best deal overall?

    1. Geoff says:

      I got that impression from the article but don’t think it’s true. I think after the term is up, it’s up. But if you break the mortgage before the 5 years is up, then you have to renew with bmo no matter what. At least that was my understand, I hope the author can clarifyi.

      1. bugeyedbrit says:

        Being tied to one bank for the entire length of a 25yr mortgage would surely fall under the unfair terms contract law, I think the assertion that its for the 5yr term only would seem a fairer interpretation, but it would be good to have it confirmed!

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