The Bank of Montreal has a new, special mortgage out right now that is getting rave reviews…..from BMO…
But there are a lot of hidden issues with this product, and I’m going to expose them….right NOW!
Oh, those sly dogs in the banking business!
I’ve always been skeptical about basically any product offered by any bank or lending institution. I worked part-time for TD Canada Trust briefly as I was completing my real estate license in 2003 (“Hello, Mr. Jones, how may I serve you today?”), and I remember telling my manager, “All banks screw people. It’s been happening since the middle-ages!”
I can’t believe she didn’t fire me. And I went on from there. “It’s every bank’s business model to screw people – that’s how they make money. They’re smarter than the general public, and the general public has a history of rolling over. All banks are the same, and you can’t go from one to the next because they’ll screw you just the same.”
Remember when banking was FREE? TD Canada Trust has one account that costs $21.95 per month!
Fees, fees, fees. Withdrawal fees, non-TD ABM withdrawal fees, email transfer fees, overdraft fees, transaction fees, minimum balance fees, monthly account fees, statement fees, and likely dozens of others.
Hey – I’d do the same thing if I was the CEO! I’m not really complaining; I understand capitalism, and if I don’t like it, I can put my money in my mattress and lose the convenience of the debit card.
Some fees are hidden, and some are up front, but the onus is always on the consumer to investigate. If the bank is smarter than the consumer (which they usually are), then the consumer should have simply done more homework, and can’t blame anybody but him or herself for being fee’d to death.
And that brings me to the subject of mortgages.
If you think banking is complicated – with hidden fees and fine print, imagine what it’s like for Joe Public to understand the inner workings of a a mortgage. That’s why I always tout the use of a mortgage broker, rather than simply walking into your neighbourhood bank, but as my readers have pointed out on many occasions – both have their pros and cons.
I’ve had a few clients ask me about this new BMO mortgage that is all the rage.
It’s called their “Low Rate Mortgage,” for lack of a better name.
Simply put, it’s a 5-year, fixed-rate mortgage at 2.99%, which blows every other mortgage out of the water.
Comparable mortgages are 3.19% right now (that’s my broker’s best rate), or upwards of 3.49% if you have a crappy broker or are being screwed by your bank.
So how come BMO can offer such an amazing rate that is 20-30 basis points better than everybody else?
Are they our friends? Are they being nice?
Are they just better than everybody else?
Or is there a catch?
Well, some of you may stand up and say “Those aren’t catches and that’s not fine print – it’s called ‘doing business.'”
That may be true, but what I’m going to do here is highlight the differences between a regular mortgage, and this special “Low Rate Mortgage” that was named Canadian Mortgage Trends’ 2011 “Mortgage of the Year.”
Here’s a partial list just from what I can tell – and keep in mind that your mortgage broker could likely dig even deeper!
1) Maximum 25 Year Amortization
They’re trying to play this off like it’s a great thing.
“Helping you pay down your mortgage faster!”
But shouldn’t the choice be left to the mortgage-holder? In this case, if the borrower wants a 30 or a 35-year amortization, then they aren’t offered this special “Low Rate Mortgage” of 2.99%. I understand that a 25-year mortgage is paid off sooner than a 30-year mortgage, and I think that even the most unsophisticated borrower on the planet would know that just from the name, and the difference of five years. But not everybody needs, wants, or can afford a 25-year mortgage.
I fear that BMO is pushing people to take a 25-year amortization just to save the 20 basis points, but it might not be the right mortgage for the borrower.
A $400,000 purchase with 20% down would carry for $1,512 per month on a 25-year, 2.99% mortgage, but only $1,378 per month on a 30-year, 3.19% mortgage. Yes, the interest paid is less with the 25-year option, but for some buyers, it’s about affordability and monthly carrying cost, first and foremost.
I’m not promoting either the 25-year or the 30-year (let alone 35-year), but I’m just saying that the consumer should decide.
2) Only 10% Lump Sum Payments Allowed
This is where the ‘big money’ comes into play with mortgages; making lump sum payments.
Many borrowers will take on a 35-year amortization to lower their monthly fees, but then they’ll make large lump-sum payments once per year when the time is right. A large portion of the downtown Toronto crew receive year-end bonuses that could be more than their base salaries! It’s incredibly important for these borrowers to have the option of paying down the usual 20% instead of 10%.
I know from experience that myself, my friends, and many of my clients have taken advantage of the 20% lump-sum payment options.
For many borrowers, it might not matter. Some borrowers might laugh when I complain that you can ‘only’ put down 10% instead of 20% as some borrowers can barely afford the monthly payment to begin with!
But regardless, the option should be there.
3) Smaller Payment Increases
Just as with the above, monthly payment increases are only allowed at HALF the usual amount.
Again – this might not matter for some borrowers, but many people decide during the course of their mortgage that they want to increase the payment amount, and with the BMO “Low Rate Mortgage,” they can only do so at half the amount allowed by most other mortgage products.
4) Fully Closed
This mortgage is fully closed, unless you sell or renew into another BMO product.
There is no early negotiating power, and you are tied to BMO for the five years.
No discharge.
No portability.
No assumption.
The only way you can discharge the mortgage is upon a sale of the property, meaning if you win the lottery and want to pay off your entire mortgage, you can’t.
With most other mortages, you can discharge the mortgage by paying a three-month interest penalty, or the interest rate differential if mortgage rates have fallen. This is absolutely, positively, essential for any mortgage, in my humble opinion.
By not allowing portability, you can’t take this mortgage with you if you decide in the third year of the term to buy a larger house. All this does is complicate your life!
And nobody can assume the mortgage, which is something that in certain market cycles can be very attractive to potential purchasers.
5) No Non-Owner Occupied Properties Allowed
We all know that CMHC rules now call for a 20% downpayment on any investment properties or non-owner occupied properties, but this “Low Rate Mortgage” isn’t allowed for ANY non-owner occupied properties, regardless of the downpayment.
So BMO will take your money for a mortgage on your primary residence, but they won’t extend this mortgage to you for your investment property – even if you have 50% down.
6) Only Valid Until January 25th, 2012
I hate “limited time offers.”
I remember signing up at GoodLife years ago and the salesperson told me that if I signed up with a personal trainer, I’d get 20% off all sessions. I said “Let me think about it,” and she said, “Well this offer is only available today, right now.”
I told her strictly out of principal that I wasn’t interested and I would never be strong-armed into a decision.
You know how if you CALL NOW and buy one Slap-Chop or Sham-Wow, they’ll throw in a second one for free? Does anybody actually believe that if you wait ten minutes to call, you won’t get two Miracle Blades or two Pasta Makers?
I despise offers that expire, even if this is how the business works.
There are so many hidden points in this “Low Rate Mortgage,” and I wonder if BMO is telling their potential borrowers about all the perils of this product.
I also hate how their advertisement says, “Choose this mortgage if you want peace of mind knowing that your rate will not rise during the term.”
Isn’t this how ALL fixed-rate mortgages work?
It’s like saying “Choose this automobile if you want the peace of mind knowing that you never have to pedal with your feet like The Flintstones.” Because how many automobiles today still get you to pedal with your feet?
“Choose to breathe air if you don’t want to die of asphyxiation. We’ll give you air for free!”
They’re trying to advertise and highlight something that is there in the first place. There’s nothing wrong with this; it’s just a bit cheeky.
All in all, I’m not surprised that a lender has put together a mortgage product like this, but it’s not a viable option for anybody I know, nor should it be.
I have nothing against BMO, FYI.
I’m just stating the facts, and advocating for the consumer.
On that note, I should also mention that Vince is back! Even better than the Sham-Wow and the Slap Chop is his new product: the Schticky:
Ralph Cramdown
at 9:29 am
On the other hand:
– If you use none of the prepayment privileges, you’ve still paid down 14.5% of the principal after five years, far more than with any other fixed rate mortgage ever offered in Canada.
– If you max out the prepayment privileges, you can have paid 41% off in five. If that’s too little for you, maybe you grossly underestimated your ability to pay.
– What kind of a moron wants to prepay a 2.99% mortgage??? Buy BMO stock instead and earn 4.8%, taxed at a favourable rate.
– Studies have shown that most people don’t use their prepayment privileges, or use them far less than they’d intended
Sheesh, a bank offers you 5 year money at an unheard-of rate that most governments can’t even borrow at, spurring the other banks into a rate war, possibly injecting the last bit of helium into a wobbly market at a time when the press is, unusually, full of negativity on housing (or, if you’re an optimist, igniting the spring market much earlier than usual) and all you can do is whine?
David Fleming
at 9:52 am
@ Ralph
Well…..when you put it like THAT….
Mad Max
at 12:28 pm
Ralph,
– People’s incomes change, windfalls occur, etc. 10% is not a competitive #.
– your third point is retarded. Lots of people do. People that want to put cash to work. Remember, that’s 2.99% AFTER TAX. Treasury real yields are effectively zero. Buying BMO stock assumes a ton of other risks (like the fact it had an 8% drawdown in the month of December ALONE!).
It is not as good a product as people think. The banks never offer the most competitive mortgage products.
Jeremy
at 10:25 am
I see both arguments, actually. Ralph is right in that BMO has started a rate war among banks which should be good for consumers and good for the real estate market. But David is right in that their supposed best rate ever and best package ever comes with a lot of missing options from what most mortgages offer. It will be interesting to see how this one plays out.
JoeQ
at 10:27 am
If you think you’ll be in a position to pay off an amount within the next five year window, why not go variable rate (where you can get a rate approaching 2%) – and pay back in those savings (which will be thousands per year). If you’re in this position to pay things off, I’m assuming you’d be in a position to handle any rate fluctuation at the end of the five year window – you’ll have much less to pay off the next time you’re choosing your plan. If you really need the security of a 5 or 10 year fixed rate to ensure you won’t get “stuck” on a possible rate increase (even though variable rates have historically performed better), maybe you should reassess whether or not you can afford that amount in the first place.
Schmucky
at 12:46 pm
Screw 2.99% mortgages… the major issue is that people are living their lives with huge chunks of shit stuck to their clothing and furniture!
Moonbeam!
at 4:17 pm
sorry — what on earth do you mean? a property?
David Fleming
at 11:42 pm
@ Moonbeam
No – he’s referring to the video at the bottom with VINCE!
buk
at 4:20 pm
@JOEQ you can’t get a variable rate approaching 2% anymore.
and i totally agree with ralph
JoeQ
at 5:19 pm
I did 8 months ago! You may be right about getting that today, though.
Devore
at 4:32 pm
Well, the advertising is limited to the rate, which brings people in. Once they find out they don’t qualify or don’t like it, the salesman goes to work and sells them a regular mortgage. Bait and switch.
RPG
at 5:10 pm
FULLY CLOSED is the biggest issue here. The rest are things people can work around, but to not be able to discharge the mortgage is ridiculous. I agree with David on this one. The product is misleading and it’s everywhere, being advertised in every paper.
P
at 6:30 pm
I usually enjoy your posts, but I think you’re way off on this rant David. This product is unique and expands the range of CHOICES that people have when selecting a mortgage. Of course it’s not one-size-fits-all. The bells-and-whistles you give up translate into some marginal rate savings. That’s the uniqueness of the product. If it’s not right for you, choose something different. I’m guessing though, that the feature limitations still meet the needs of a healthy proportion of mortgagees.
btw, I find my $29.95/month TD select service account is awesome. I get my fees waived and find the overall value to be very good. It’s not for everyone though.
JoeQ
at 9:06 am
It’s worth remembering that those user fees you’re “saving” are also arbitrarily thrown in there by the bank.
Daniel
at 11:40 pm
@ P
If you enjoy paying $29.95 per month for a banking service that *should* be free to all consumers, that WAS free to all consumers up until 5-10 years ago, then you’ve been drinking the kool aid that they’re selling. We the consumers give banks the money they need to loan in order to make profits. Without us they have no business. Or at least that’s how it used to be, now they make more money off us in fees than they do with their loans. It’s people like you who stand up and defend them and actually SUPPORT and RECCOMMEND services like the TD select that we have to blame for banks continuing to screw us.
Ralph Cramdown
at 1:07 am
You just don’t know how to read the ads. TD sent me a promo for that account; sign up, meet a few requirements, and in three months they give me $150 bonus. All fees waived with a $5k deposit. Do you know anywhere else I can get a 3 month GIC that pays 12% these days?
Havoc
at 9:52 am
@ Daniel
I don’t think P is saying that he enjoys paying the bank fees. No one does. However most accounts at TD automatically have your monthly bank service fees waived if you maintain a minimum balance. I have an infinity account with TD and my monthly fee gets waived if I maintain a balance of $3000+ per month. Some accounts waive with a smaller minimum balance. You’re right though about the other fees (email transfers, stop payments, viewing cheques), they’re silliness and im sure they are one of the reasons why TD Bank CEO Ed Clark made $1.4 million in base salary and $9.8 million in bonuses in 2010.
@ Dave
The BMO low rate mortgage is a smart move that will ultimately increase their business. How can you say it’s not a viable option for anyone? 25 year amortization is not that bad, remember that used to be e maximum at one point. If I’m looking to buy a house today and plan to beliving there for the next 10 years then this is the best mortgage I could get. The positive outcome will be that I save a ton of money over the next 5 years. And the only negative outcome for you would be that your mortgage broker doesn’t get my business. I’m sure if it was you mortgage guy offering this deal your post would’ve put such a positive spin on the product. I’m really starting to question whether your mortgage broker it you up to this one.
David Fleming
at 12:32 pm
@ Everybody
I’d like to think that I can always admit when I’m wrong. Or at the very least, make note of when popular opinion differs from mine.
I have the benefit of many very intelligent blog readers, and the comments above demonstrate that.
I think the best point is what “P” said about CHOICE. This product does give the borrower more choice, and that’s likely a good thing in the mortgage market.
I guess my major issue with this product is that when Joe Average thinks he’s getting a great deal – a 30-basis-point drop from the normal rates, the banks aren’t likely going to say, “By the way, here is a list of the differences between this mortgage and all the other mortgages in the market.”
To me, a fully closed mortgage is not an option, in any circumstance. Not being able to discharge, port, blend, or assume this mortgage is a non-starter. But my readers make an important point: most people who are looking at this product likely won’t ever have the option of discharging the mortgage.
I think there ARE many borrowers who could benefit from this mortgage, but I would ‘hope’ that they’re made aware of all the things they’re giving up in order to save 30-basis-points.
Oh, and last but not least, it’s been said that this product might start a rate war, which of course is beneficial to borrowers (albeit not to the long term health of the economy), so who doesn’t love a lower rate?
Thanks to everybody for their opinions.
jeff316
at 1:08 pm
The riskier play right now is the 10 year mortgage under 4 percent. That could be a huge steal if you stay put, or an immense burden if unforseen life circumstances mean you have to pay the penalty to discharge the mortgage early.
If rates stay low, just wait for a few articles about disgruntled mortgagees stuck in a ten year fixed rate in a few years.
Moondoggy
at 2:22 pm
it is good to see such debate. i think it is fair to say that not all mortgages are for all people. the underlying issue is that “rate” is not everything. a good mortgage with a slightly higher rate is far better for the consumer than a bad mortgage with an outstanding rate. Remember, if it seems too good to be true, it’s probably a duck. hahaha!!!
a more benificial mortgage is one that is right for the consumer taking into consideration, rate, term features and benefits. the fact of the matter is that a rate of 3.24% is easily acheivable today and that mortgage has everything and then some. that is only .25% more than the BMO special which is a limited product. haveing said that, some people may like the limiting features of the BMO mortgage. wow, not sure why. i would rather have features….
Geoff
at 9:12 am
@ DAvid – I totally agree with Ralph’s analysis and your comment about being wrong is a good one on your part.
You should, however, put it as an ‘editors note’ at the bottom of your original posting rather than put in the comments where not everyone will see it.
Krupo
at 12:53 am
Nah, it’s the ‘prize’ for following through to the bottom 🙂