March 7th, 2012

BMO Cranks Up the Heat Again

BMOBMO is dead-set on winning mind share among consumers.

It’s coming back to the market with two new deep-discount rate promos:

  • A 5-year fixed at 2.99%
    (which starts Thursday, March 8, 2012)
  • A 10-year fixed at 3.99%
    (which starts Sunday, March 11, 2012)

Both of these specials are low-frills, meaning:

  • A Lower Maximum Amortization:
    25 years versus 30-40 years elsewhere
  • Less Lump-sum Pre-payment Ability:
    10% maximum per year (i.e., 1/2 of the 20% that BMO normally allows)
  • A Smaller Payment Increase Option:
    Up to 10%, once per year (again, 1/2 of the 20% that BMO normally allows)
  • A Locked Term:
    The Low-rate Mortgage is fully closed unless you sell the property, refinance (with BMO only), or early renew into another BMO mortgage. In other words, unless you sell, you’re not leaving BMO for 5 years, like it or not.

Both the 5-year and 10-year promos run for 3 weeks, until March 28, 2012.

We’ve heard talk that TD and RBC will not match BMO’s pricing on the 5-year term. We’ll see. The last time BMO ran this special, its competitors quickly responded with 4-year rates of 2.99%. Despite being one year shorter, those competing offers came with all the normal bells and whistles.

Unfortunately for competitors, a 2.99% five-year rate makes more headlines than a four-year promo at the same price, and BMO knows it. This deal has garnered almost a dozen major media stories already, and the press release only came out four hours ago.

Cut-Mortgage-RatesAs for BMO’s 10-year deal, it is 146 basis points below the nearest Big 6 bank competitors’ advertised rates. It is BMO’s lowest 10-year rate ever, and it matches ING’s current 3.99% offer. (ING was the first bank in Canada to advertise 10-year rates below 4.00%.)

With these rates, BMO is starting to make other big banks look increasingly silly. CIBC, National Bank, RBC, and TD are currently promoting 5-year “special offer” rates of 4.04%. That’s 105 basis points above BMO (albeit with more flexibility). Those rates border on ridiculous, and they insult the intelligence of increasingly savvy consumers who know that well-qualified borrowers rarely pay anything close to those rates.

Yes, we say that knowing that BMO’s Low-rate mortgage is highly restrictive and not suitable for most.

It is, however, suitable for some. The target market includes many:

  • First-time buyers
  • Rental property owners
  • Owners of 2nd homes

The customer should have no foreseeable need to break, increase or aggressively prepay his/her mortgage for five years.

In posting more transparent rates than its peers, BMO is taking a page from brokers and smaller rivals. In doing so, it’s building credibility with consumers at its competitors’ expense.

Frank Techar, BMO’s Canadian banking head, tells Bloomberg: “The reaction to our January offer was fantastic.” With a mortgage market that BMO CEO William Downe admits is “slowing,” 2.99% is a big fat worm on a hook. It is bait that gets BMO’s phones ringing.

It also gives BMO’s sales force a chance to upsell people into higher margin mortgages without all the restrictions of BMO’s Low-rate product. (There’s a lot of that going on, according to the BMO mortgage specialists we’ve talked to.)

With this rate sale, BMO is certain to take flak for fuelling consumer borrowing at a time when high debt levels are worrying policymakers.

Frank-TecharTo that end, Techar maintains that BMO is not fuelling the fire. He tells the Financial Post that these rates “are consistent with the debate around the need to reduce consumer debt levels.”

In an interview with Reuters, he said: “People are not going to stretch to get the largest mortgage they can with a 25-year amortization product. Because the monthly payments are higher, they…will go to a 30-year amortization product.” (He’s right.)

Downe recently said this to analysts about BMO’s Low-rate Mortgage:

We think that’s a product that is good for Canadians; it’s good for Canada; it’s good for our customers, and we intend to continue to promote it in this environment.

It’s a product that we believe addresses all of the risks that are currently being debated, whether or not the consumer debt levels that are too high in Canada and a possible fallout from economic slowdown and rising interest rates.

It helps our customers pay less interest.

It mitigates their interest rate risk for five years.

It helps them retire debt free by paying off their balance faster, and it works against market price appreciation. In fact, it helps with…house price appreciation, because the shorter amortization reduces the maximum purchase price people can afford.

Being a 5-year fixed, this product does mitigate some risk. A 200 basis point rate increase by 2017 would only lift payments $133/month on the average Canadian mortgage of $151,000.

Department-of-FinanceAs for rumours that policymakers are ticked off by BMO’s pricing, the last time anyone looked, it’s still a free market. BMO can price as it sees fit within regulations. As long as underwriting standards remain high, God bless it for bringing down rates industry-wide.

Even if rates like 2.99% do spur more interest in mortgages, it doesn’t mean lenders will approve high-risk borrowers. BMO’s average loan-to-value (LTV) is just 60%. More notably, BMO’s residential mortgage portfolio has a long-run loss rate of less than 2 basis points (i.e., exceptionally low).

************

Barring a run-up in bond yields, we could now start seeing competitors (like mortgage brokers) respond with full-frills 5-year offers that are just a pittance above BMO’s rate. Some might even match or beat it.

We’d strongly encourage most folks to consider paying a bit more to avoid the low-rate mortgage restrictions—especially if the premium is small (0.05%-0.10%) and especially if you can benefit from the service and extras that come with a standard mortgage.


Side Note: Here are a few more details about BMO’s Low-rate Mortgage:

  • Rate Hold: Up to 90 days
  • Pre-Approvals?: Yes
  • BMO Mortgage Cash Account: Not available with the Low-Rate mortgage
  • BMO Skip-a-Payment: Not available with the Low-Rate mortgage
  • BMO ReadiLine: Not available with the Low-Rate mortgage
  • Rentals Allowed? Yes
  • 2nd Homes Allowed? Yes

Rob McLister, CMT

46 thoughts on “BMO Cranks Up the Heat Again”

  1. I am actually surprised that this offer resurfaced. BMO must be rolling around in cheap money.
    Some FI’s are currently paying 2.75% to source 5yr. fixed deposits. They cannot possibly turn this money around and offer it back in the form of 5yr. mortgages at only 2.99%
    Its going to be tough for mono lenders and Credit Unions to compete at this level and that is not good news.

  2. True North Mortgage has a 10y fixed at 3.84% with 25/25 prepayments. Why would someone choose BMO’s offer over TNM?

  3. Brain, True North simply cuts their commission and buys down every rate. Who wants to work for nothing. More importantly, who in the right mind would discount their worth?
    That said, any monkey can offer 3.84%.

  4. Denis, What’s to match? The product is garbage! I would never recommend a product like this, BMO or otherwise.

  5. Rob, you’re saying here that this mortgage isn’t suitable for most…. Will someone explain why this is SOO restrictive??
    - So you can’t refinance (except with BMO) – mortgage rates have been setting new lows consistently over the last 5 years, that’s why everybody’s been refinancing… because you were paying considerably more then what you could be. Considering rates aren’t getting any lower, why would anyone want to??
    - Yes, after 5 years rates will be much higher and people will have to adjust to higher payments… but citing that as a detriment to this mortgage is like saying you shouldn’t buy anything at a discount ever because you’ll be dissapointed the next time you have to buy that same thing at regular price. So what, should we all choose a 3.5% mortgage now and choose to not save money just because 5 years later we’ll be saving even less money?? Makes no sense…
    As far as I know, if you move, the mortgage is portable. I know I would want to take a low rate mortgage with me… why not?? If you get a bigger mortgage, you’ll have to pay a higher blended rate, but that blended rate will still, by definition, be lower then the prevailing 5 year rate at that time..
    The lower prepayment privelages are the only major drawback I can think of, but all the years I’ve had a mortgage, I’ve hardly ever made a significant prepayment. 10% instead of 20% almost means nothing to me, barring the unforseen substantial (sustained) raise in pay, or a lottery win.
    I just don’t get why most people shouldn’t take this mortgage…

  6. I don’t think True North gives much advice or strategy for that rate. Other brokers have the same rate or close to it, with service.

  7. Why are people expecting the other banks to match this offer? BMO’s low-rate mortgage is a very restrictive product and the way they’re marketing it, saving you money because the amortization is limited to 25 years, is just laughable! Only the most novice mortgage consumers fall for that kind of crap.

  8. Not necessarily because not everyone can make use of this product. If I’m a person who wants to take advantage of today’s low fixed rate and pay down my mortgage as much as I can (which, I believe, is certainly a worthwhile investment strategy given that a balanced portfolio would return about 5% these days if you’re lucky), BMO’s low-rate mortgage is the last thing I would look at.
    Moreover, when BMO first introduced this promo back in January, some lenders were offering less restrictive mortgages for only 10 to 15bp more. Those mortgages not only carried longer amortization but also provided more flexibility to perform prepayment planning which, unlike BMO’s offer, *would* actually save people money and not completely lock them for 5 years.
    While I commend BMO for making fully discounted rates more transparent, I hope that consumers who are enticed by this product would carefully consider its limitations and how they may impact them in the future.

  9. Actually, its not a cheap money, this is a loss leader right off the top. If you look at Bond Yeilds and cost of funds, from the day this deal funds, it actually creates a loss for BMO.

  10. It is so restrictive because BMO doesn’t want the client to leave-it’s that simple. Lets face it, life happens and sometimes you have no choice but to go with another lender due to circumstances. Furthermore, let’s suggest you want to refinance, at that point you will have no choice but to accept whatever rate BMO gives you because they have you locked in! ZERO power to negotiate!! Your only out is a bonafied sale. They are preying on the consumers own ignorance.

  11. Way to go Beee-Mo…..i can only smile at the thought of how the ceos at the other big banks are probably twitching as they tuck into their steaks and dom perignons at the bay st. club, and cursing at the bank breaking out of the greedy boys club….

  12. I find the “protectionist” attitude of a (very) few brokers quite repugnant. To say, as Jeremy ( sorry jeremy if your not a broker, I take the accusation back!) says “the product is crap” is ridiculous. The BMO product is a good product. Its “restrictions” are minor for most Canadians who 1) don’t make larger prepayments per year than will be offered and 2) are unlikely going to need to want to jump out of their closed mortgage to refinance with another lender who will have lower rates over the next 5 years. Yes, it means I will have to explain my services a little stronger and or lose some business in the short run. Most of us didn’t go out of business last time round, and the couple of clients of mine that I “referred” to BMO have rewarded me with other referrals for ‘lost” business. Let’s try to be objective, as I think the article did on its own.

  13. I have never had the extra cash to prepay my mortgage or lump sum payments so the restrictions are not that much of a big deal.Which is probably why I still have a mortgage after all these years. So if I actually could put the 10% and lower amortization with a bit higher payments I probably will be ahead of the game or better than I was. In this case I am just looking at the rate and this seems to me that this is going to be as low as it will go. Does any one agree.I have 2 rental houses with variables and a cottage that is open. Also a primary residence that is a matrix mortgage with Firstline and I like the fact that as I pay it off the line of credit gets more but I keep thinking this is as low as it is going to go so I should bit the bullet and be stress free for 5 years at least. Any advice out there.

  14. I just called True North to verify this rate and they offer it coast to coast. It is a full feature mortgage compared to BMO’s restrictive terms and conditions. The guy I spoke to knew his stuff.

  15. Although first time buyers might gravitate to the BMO 5 year deal, the 4 year term is the better option as that term results with the renewal in an American election year when, history tells us, rates are usually on a downward trend.
    Encourage your clients to consider this option and they will get a better rate and the chances of renewing at a better time.

  16. I dealt with True North Mortgage two times in the past three years for both my main property and my second home. The rates were competitive and the service was the best I have ever had. I highly disagree with MD and Jeremy. True North went over and above for me and I will definitely use them come renewal time.

  17. No offense taken. You’re entitled to your opinion and I respect that. You suggest the BMO product is a good product, compared to what? drmortgage, I would hope that you would place your clients into great products not just ones that are good enough! Don’t get me wrong, the product might be just fine for some. However, again, one never knows what the next year, two years, etc…will bring and in my opinion, it’s better to have flexibility and not need it than to need it and not have it. If you have ever had MCAP customers, ones with the old bonafied sale clause, and literally be stuck, you would understand my position.

  18. Show me your charts that would suggest Canadian fixed rates are lower during a US election year? Have you plotted historical bond yields, fixed rates, and historical events leading up to a US election year? It is a myth!

  19. firstline’s historical rate sheet for variables last week shows the 4 yr lows being quite consistent since 1990, and close with the 5 yr fixed although the fixed is less reliable on this sheet as it does not use fully discounted 5 yr rates

  20. Have a look at an Andex Chart. It’s important that you plot recessionary periods and economic slow downs. Fully discounted rates or not, it makes no difference-it could be posted rates for that matter. I’d suggest looking at the bond as well.
    Enjoy the day everyone!

  21. Does your mortgage broker stay in contact with you and help increase the payments, even slightly so that you are getting ahead? Guaranteed a bank would never do this, and only some brokers are….so as a consumer, I would question who is truly working in my best interest? Interest rates are one thing, but a plan to pay off the mortgages faster is totally another! And it can be done without painful payment shocks. Ask a broker who uses the Inflation Hedge Strategy :)

  22. “We’ve heard talk that TD and RBC will not match BMO’s pricing on the 5-year term. We’ll see.”
    Here is the true response from TD:
    TD Canada Trust is offering a four-year special mortgage fixed
    interest rate of 2.99%, effective March 9th, 2012.

  23. “True North simply cuts their commission and buys down every rate”
    Jeremy, you have absoulutly no idea what you are talking about!

  24. Reply to Econowatcher
    It is interesting to note the comment regarding BMO upselling their clients into a more feature filled mortgage with less restrictions.
    Full featured mortgages with far more privileges and not tied to a lender are available at 3.19 or less not 3.50%.
    This is the old game of bait(the worm)and switch and is designed to get the client in the door.
    On your blend comment,banks have been in the habit of blending mortgages at posted rate for remaining term with the discounted rate on the existing balance,resulting in a higher overall rate.If you are locked into that lender,you really have no option but to accept what they offer you.
    Finally,it gets down to advice to the client on the best future strategy with their mortgage and BMO does not have a good track record in this area nor in fact,do many of the majors.
    I recently had a client who was talked into two cash back mortgages with BMO- no disclosure of the future implications of that decision.He wanted to refinance to lower his rate and found out his penalty to do so was close to $17,000 on one mortgage and $9,000 on the other.They offered a blended rate which resulted in him being locked in for a further 5 years at a rate much higher than he could have obtained elsewhere currently.
    Interestingly,I assisted him in negotiating the blended rate with BMO,at no cost to him in the process.They offered him two higher rates until they finally offered him a better rate and did so with the pressure of “you must sign today to get this rate”
    With over 23 years dealing with clients and having the flexibility to move them to various institutions to provide interest savings to the client,I served their best interest,not the institutions.
    My clients are choosing to benefit from an Inflation Hedge Strategy that provides them with long term security,protection from future payment shock,creation of future equity and a full featured mortgage that allows them the flexibility they need to create a better financial future that benefits them,not the lender.I am doing this all at no cost to the client and at a better rate than currently offered by BMO.
    I don’t believe in bait and switch.I believe in doing what is best for my client,not the institution

  25. Hi Joanna,
    Note that we wrote “on the 5-year term.”
    A response from TD and other lenders was naturally expected, but not with respect to matching BMO’s 5yr pricing.
    Cheers…
    Rob

  26. It’s very silly to attack True North; they are highly regarded in the industry by lenders and clients.
    We have to stop making dumb comments on every firm who buys down a rate.

  27. In January when BMO offered the Low Rate mortgage I thought it was for owner occupied homes (not rentals), – has this changed? There is no mention on the web site about property restrictions now.

  28. Give me a break that you think ” a bank would never stay in contact with you and help increase the payments.” The complete reverse is true; the transactional mortgage broker would not offer this service. Once they do the mortgage; Adios !! and see you again next time you buy a home…

  29. I would like someone to really explain if this mortgage is ‘portable’.
    As I understand it, from past experience using a Big6 lender, to port a discounted mortgage means that, to avoid an IRD (which would be insane in this case comparing 2.99 to whatever posted 5-yr rate they have at the time), you have to lock your new mortgage (which has to be the same or higher borrowing value), for the same or longer term, at whatever posted rates they have at the time. You do _not_ get to keep 2.99%.
    Please correct me if I’m wrong but that’s a gamble in any case when your talking about porting a new mortgage to BMO’s posted rates.

  30. Thanks BigBanker for adding more ridiculous generalizations to the pile.
    It is nonsense to suggest that most mortgage brokers are transactional. They rely on renewals and refinances to make a living!
    Banker don’t get paid on renewal so what incentive does a banker have to service clients with the same attention and care as a broker? Potential referrals? Brokers get those too. Plus they get paid again at renewal, but ONLY if they work in the client’s best interests. Your post is senseless.

  31. 5yr GCAN bonds hit 1.50% today. If yields continue to increase, I see this BMO offer being withdrawn long before March 28th.

  32. My mortgage broker was always in touch just never had the extra money to increase payments or lump sums. Was pre-approved for the BofM and have 90 day hold on the rates and that was the 2 rentals and primary residence just haven’t pulled the trigger yet. There just seems to be so many negative comments on this B of M product that I am just not sure. Can the fixed rates get ant lower I don’t think so. I’ve been riding the variable wave and I am thinking I want piece of mind instead. % years from now it is deffinetly going to higher that 2.99 but how much? This is an interesting and informitve site. Thanks

  33. 2/3 of people break a 5 year mortgage before maturity. There are a 1,000 reasons why. Getting a better rate is just one.
    Like Jeremy said, on a mid-term refinance BMO has no incentive to give you a good rate because it knows you are trapped.
    No one is saying to get a 3.50% mortgage. There are options aplenty at 3.19% that don’t handcuff you to one lender and restrict you from making big prepayments.
    PS. A lot of conventional borrowers get readvanceable mortgages. In those cases this 2.99% rate doesn’t apply.

  34. I can’t believe how many people are saying this is a bad product! Are you out to lunch! Given the amount of debt plenty of Canadians are in LOC’s, HELOC’s, Credit Cards, Student Loans, Car Payments etc. and people are worried about the extra 20% paydown? Right!!! Everyone likes the option to pay down the mortgage. But how many do? And why would you with other higer rate debt?
    Additionally holy contradiction! Complain about the lack of ability to pay it down more quicky but in the same breath rip the product for not offering longer amortizations? Which one is it?
    I’m wondering if you can get that rate with a less than 25 year amortization? Anyone? I’m ocnsidering taking it and paying out my existing and doing a 19.5 year am.
    Also wondering about the portability and the rate you’d blend with new monies?
    For that rate, if I moved I’d probably just rent my current house out and buy a new one.

  35. Bill in Winnipeg Home of the Jets,
    I am a Big six Mortgage Advisor and last time BMO offered the 2.99 restricted 5yr my bank offered a 4yr fixed at 2.89% and we were getting some clients 2.84% on the 4yr. Fully featured and available on rentals with 30yr AM’s
    Some food for thought that better deals may be around the corner…
    Also as a side note you may want to consider longer Amortizations on the 2 rental properties and direct the excess cashflow to rapidly pay down your primary residence as the interest not principal portions of your payments are tax deductable so pay off your residence as there may be more than interest savings to your situation??

  36. BMO has a matrix they use for the blends for ports and refinaces and it does not authorize full discount on the new money when doing either a same term blend or extended term blend!!
    I am no longer a BMO employee although I sat down with one of their Specialists and it was under 100BPS off posted that they were aloud to discount and that was on the 5yr blend and extend… on the 2 and it may have been the 3 year no discount from posted was available!
    Someone from this site who has a fixed term with BMO should go into a branch and ask if they added 100K to their existing mortgage for the different options what discounts are available on the new money and post it here for consumer awareness!
    Still I would not bash the product as this is a right fit business and judgement is not productive! Clients just need to be advised of full extent and details of the choices they are presented!

  37. i dont see why theres so much hate for BMO, i have a 5 year/35 mortgage with BMO, thier rate 3.44 was the lowest we could find at the time, plus got free banking for 5 years, and they opened our HELOC for free on our old house (we built a new home)
    They always responded to our calls quickly.
    Night and day compared to when we used First National and would wait weeks to get a callback.

  38. Does anyone know if the payment options are being restricted? Can I make bi-weekly accelerated payments, or am I stuck with monthly?
    Hopefully someone can answer that one.

  39. FYI for those of you in Southern Alberta, First Calgary has posted a 3, 4 and 5-yr 2.99 promo will full prepayment, portability, probably even 30-yr amortizations too (though I havent confirmed that).
    Also the great 2.39 1-yr promo is still on for those still wanting to ride that horse.
    https://www.firstcalgary.com/Mortgages/

  40. From BMO’s website:
    Flexible payment options are available to allow you to choose the frequency of your payments – weekly, every two weeks, twice a month, or monthly, in fact, you may want to coordinate them with your pay cycle.

  41. that term results with the renewal in an American election year when, history tells us, rates are usually on a downward trend.
    This isn’t astrology. If the economy is doing better in four years, rates will be higher. If you think its going to be worse in four years, hold off on buying a house, as inflation adjusted prices will likely fall.

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