Ratehub, January 16, 2012
The Bank of Montreal (BMO) made a splash last week with the announcement of its 5-year 2.99% fixed mortgage rate, the lowest in history. This follows months of lenders’ being able to access cheap mortgage funding in the bond market.
If you think 2.99% is too good to be true, you may be on to something. Although borrowers can access 2.99% (aka it’s not a ‘bait and switch’), the mortgage does come with its share of restrictions. The BMO Low-Rate mortgage is what is often referred to as a ‘no frills mortgage’, meaning it comes with a low rate but limited ‘frills’ or add-ons.
A typical mortgage has a rate hold of a few months (60-120 days), generous monthly and lump sum prepayment options (20% is the norm but the monthly allowance can reach 100%), and an amortisation period of up to 30 years.
The BMO Low-Rate 2.99% mortgage falls short of these stipulations.
1. The maximum amortisation period is 25 years. The actual maximum amortisation period on insured mortgages in Canada is 30 years, five years more than offered on the BMO mortgage rate. BMO is spinning this gap as a positive by focusing on the ability of borrowers to be mortgage-free in 25 years. However, this also means you will qualify for less mortgage and limit your affordability.
2. You are granted only 10%/10% prepayment privileges. This is less than with a standard mortgage and means you are limited in how fast you can pay off your mortgage should the desire or ability arise.
3. You cannot skip or double up a payment. An annual ‘skip a payment’ provision is an increasingly common feature with standard mortgages, and provides some flexibility if you are faced with financial hardship at any time over your mortgage term.
4. You cannot refinance or switch your mortgage to another lender for five years. This provision is perhaps the most restrictive because it is not uncommon for borrowers to break their mortgage early. You would want to be certain you are committed to the full five year term and do not expect your circumstances to change.
The BMO rate of 2.99% is undoubtedly very attractive, but beware the fine print. You should evaluate whether the cost savings of a slightly lower mortgage rate outweighs the cost of limited flexibility.