On Saturday, the Bank of Montreal (BMO) lowered its 5-year fixed mortgage rate from 3.09 to 2.99 per cent. Last year, BMO made this same move, which at the time was the lowest rate in history (including on our site). In 2012, BMO’s 2.99 per cent offer sparked a mortgage rate war among lenders, which is one of the factors that eventually led to Finance Minister Jim Flaherty’s concern of Canadians taking on too much debt, which later sparked him to change the qualifying mortgage rules.
Today, however, BMO’s 2.99 per cent offer is anything but low. True, among the Big Five, BMO has the lowest posted rate. But rates accessible via mortgage brokers have been sub 3.00 per cent since June 2012, and the lowest 5-year fixed rate on our website as of today is 2.79 per cent in Ontario. When you compare the two rates, a homeowner with a mortgage of $400,000 would save ~$2,500 over the 5-year term by opting for the lower rate.
Perhaps because this was such a controversial move last year, people are taking notice of BMO’s new, not so low offer. But we know that Canadians can access similar rates elsewhere, and have been able to for months. And unfortunately for those who buy into it, BMO’s Low-Rate Mortgage is a product that comes with some major restrictions:
- You only get 10%/10% prepayment privileges. Where many other lenders give homeowners the option to increase their monthly payments by 20% or more each year, as well as make lump-sum payments on the original mortgage in that same percentage range, BMO’s Low-Rate Mortgage restricts homeowners to 10% for both categories. This makes it extremely difficult to pay down the mortgage sooner, without facing a prepayment charge to do so.
- You cannot skip a payment or access a mortgage cash account. BMO has a number of flexible mortgage options, none of which are available to customers who lock into the bank’s 2.99% mortgage product. Skipping a payment, should you need to, is not an option. And while other BMO mortgage customers can re-borrow prepaid funds at any time, through a Mortgage Cash Account, those with the bank’s Low-Rate Mortgage do not have the same privileges.
- You cannot transfer your mortgage to another lender until your term is up. Throughout your 5-year term with BMO’s Low-Rate Mortgage, the only way you can refinance, transfer or payoff the balance of your mortgage, is if you stay with BMO while doing so, or if you sell your home. This restriction is especially tough, as it is not uncommon for homeowners to break their mortgages early. And don’t forget that doing any of these things would result in a mortgage prepayment charge.
If you’re shopping around for a mortgage with the Big Five, BMO’s 2.99% offer may seem attractive at first. But with many brokers being able to offer customers similar and even lower rates, we don’t see any reason for people to go running after this restrictive mortgage product.
“Most banks aren’t advertising 2.99 per cent, but I know if you walk into any branch in the city right now they’ll start off with 2.99 per cent as the starting rate,” Toronto broker Christopher Molder told the Globe and Mail this weekend.
Like any bank product, it’s important to read the fine print and know exactly what you’re locking yourself into. The only question left now is… will other lenders follow suit and start lowering their rates? We’ll keep our eyes peeled.