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March 09, 2012

Rates & Restrictions. Lenders Trade Jabs

rate-or-flexibilityFlexibility or low rate?

It’s a question that’s being aggressively debated as we speak.

BMO’s latest 2.99% 5-year Fixed promo has triggered another heated battle for your mortgage application. That means, as a consumer, your mortgage choices are historically cheap.

At this very moment, you can get a:

  • 5-year fixed (Low-frills) at 2.94% to 2.99%
  • 5-year fixed (full-frills) at 2.99% to 3.19%
  • 3-year fixed at 2.69% to 2.79%
  • 1-year fixed at 2.49% to 2.79%

Lenders are coming out with one promo after another to counter BMO (and other competitors) and to keep their application pipelines full.

Most lenders, including the big banks, are refusing to match BMO on 5-year pricing. They’re taking a 4-year tack instead. This includes all the new 2.99% 4-year fixed offers from TD, CIBC, Scotiabank, RBC, Street Capital, First National and others.

But some deals are even more aggressive, especially on 5-year pricing, which has a higher demand than 4-year money. For example:

  • Many brokers have access to 5-year rates that are either below 3%, or slightly above if you prefer no unusual restrictions and/or features like large prepayments (up to 25-30% lump-sum), readvanceable credit lines, amortizations up to 40 years, etc.
  • Many credit unions, who fund mainly through deposits, are flush with cash and ready to bargain. Three red-hot deals from the CU-sector are:
    • First Ontario’s 2.99% full-featured 5-year (available through brokers or direct)
    • First Calgary’s 2.99% full-featured 5-year (available only direct)
    • Coast Capital’s 2.98% full-featured 5-year (available through brokers or direct)

Best-Mortgage-RateLow rates sell. No revelation there. The last time BMO ran a 2.99% offer, Frank Techar (BMO’s Canadian banking head) said that, “We saw an increase in volume almost immediately and it continued for the whole two-week period.”

BMO’s competitors are trying to slow that momentum this time around. In turn, they’re wasting no opportunity to take shots at the fine print in BMO’s Low-Rate offer.

As one example, RBC said yesterday:

"Some low rate mortgage offers advertised in the market are highly restrictive. No frills may be great in the supermarket, but it's usually not the best choice for your mortgage,"

TD said:

"With all the available special offers in the market, consumers may be tempted by simply choosing the lowest rate. However, for many customers, the best mortgage offer may be the one that recognizes that life isn't always predictable…”

“TD is committed to making it easy for customers to [prepay their mortgage]...” (Post article)

Scotia added:

"Rates are important, but they are one tool in a broader kit for managing a mortgage."

And even credit unions like First Ontario (Ontario’s 4th largest credit union) are jumping into the melee:

“…the financial future of our members is not a game…We are committed to providing the lowest possible, flexible rate…with no special conditions or smoke and mirrors.”

“We don't use mortgage promotions to lure potential customers and then upsell them."

BMO has begun to answer this criticism. In a release today it said, "Some banks are providing only four years of protection…(yet) interest rates are expected to begin rising next year.”

Regarding competitors’ previous run at BMO, Techar said:

“They matched us on the rate, but on a four-year term.”

“We offered one more year of protection against rising rates.”

As for BMO’s smaller prepayments, that debate may be largely overblown if you consider the stats. BMO tells CMT that only a small percentage of its customers (4%) make prepayments over 10% in a given year. Overall, just 17% of borrowers made lump-sum prepayments last year, says CAAMP.

BMO-BankThe bigger issue with BMO’s Low-Rate mortgage is actually the restriction against leaving prior to renewal. The only way to do that is with an arm’s-length sale of the property.

The majority of 5-year fixed mortgage holders break and/or add to their mortgage prior to maturity. There are endless reasons for this, including:

  • upsizing
  • job loss
  • separation/divorce
  • death of an applicant, or
  • refinancing to:
    • get a lower rate
    • get a lower payment
    • make an investment purchase
    • consolidate debt
    • pay for medical expenses
    • fund a child’s education
    • pay for a renovation, or
    • meet personal needs.

To allow for these possibilities, BMO’s Low-Rate mortgage lets you refinance and early renew.

The downsides are:

  • BMO may not have the rate, terms or features you desire at the time of refinancing.
  • BMO doesn’t have to offer you its best discretionary rates since it knows you can’t escape before maturity.
  • There are penalties to consider if refinancing. BMO might not be as compelled to negotiate on penalties and fees since you’re a captive customer.
  • BMO is not obligated to early-renew or refinance you if you don’t meet its approval criteria.

For these reasons, having an escape route from your lender can often be essential.

On the other hand, if you can’t find a materially better deal than BMO and you’re willing to bet you won’t need to break (or add to) the mortgage early, then BMO’s Low Rate product may potentially be a fit. As competing lenders match or approximate BMO’s rate, however, the odds of that being true diminish significantly.

One takeaway is this: Low-frills mortgages are here for the long haul. As such, this debate between flexibility and rate won’t go away anytime soon. Your best weapon to navigate the plethora of mortgage options is knowledge. Having a trusted expert help you compare the pros and cons of each rate sale is invaluable, because there’s nothing worse than finding out about costly restrictions after signing on the dotted line.

Rob McLister, CMT

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