March 9th, 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

31 thoughts on “Rates & Restrictions. Lenders Trade Jabs”

  1. Full feature mtg vs low frills mtg…no headlines there, no controversy, no one cares.
    Get aggresive with the rates and we see the fallout.
    BMO’s promo product may not be good for everyone as the article above explains, however a competitive market is good for everyone!

  2. Something like 0.1% is a small premium to pay for a mortgage with no ball and chain. I don’t see why you’d want to limit your options at BMO for such a small savings.

  3. BMO’s offer rocks !
    Everyone that speaks against it is just venting.
    Lowest rate is the decision maker for most Canadians. And prepayment privileges are still good.
    BRAVO BMO !

  4. Maybe a competitive market is good for the consumer but an extended rate war that results in big banks permanently eliminating the competition is not.

  5. Evidently people do care.
    As a mortgage adviser, this is a vital discussion to have with clients. Restrictions come with a cost and the negligible upfront rate savings doesn’t justify that cost. If it did then everyone would get one of these handicapped mortgages.

  6. Any mortgage professional who sells on rate will loose more business than they close … there is always a cheaper mouse trsp. Sell the service … become a true professional and you will close far more business. Rate starts the discussion but the my favourite response “What’s your best rate” is (let’s assume I am speaking the a general contractor)… “What’s a new kitchen cost?” If the prospect makes pizza for a living … “What’s a pizza cost”.
    It brings it home to the prospect that rate is just one of the components of a strong mortgage program and normally as the discussion progresses the rate issue slides to 3rd or 4th place among the issues.

  7. Do you truly say that? If so, I would think you were being childish, unprofessional, manipulating and arrogant.
    If the rate in your mind is always 3rd or 4th place among issues, you’re sales model is one dimensional and your following your own agenda (selling custom granite kitchens with European appliances or loaded Xlarge pizza’s when many clients want something different).
    Instead of getting defensive when a prospective client first starts the conversation about a competitive price, appreciate that a true professional manages the whole sale process without it appearing so.

  8. How much do you ask for your car? If you want to sell your car you have to ask the lower price or to find a sucker…

  9. banker in an ivory tower,
    You’re comments are out of line.
    Childishness, unprofessionalism,
    manipulation and arrogance have nothing to do with it. It’s a question of what a mortgage professional’s experience, lender connections and strategies are worth to a homeowner.
    Mortgage consultants are anything but equal. If you think you’ll get the best service and advice with the lowest rate, you’re kidding yourself. It’s like expecting an lawyer who charges $40 an hour to provide the top-notch legal counsel.

  10. @Advice, you’re humorous.
    According to BMO only 4% of ppl prepay more than 10% a year. Looks like this is a viable option for the miniscule 96%. Only 17% of ppl made extra payments according to CAAMP, prepayment options are not a big deal (or not possible) to the majority of canadian mortgage holders,
    However,
    The restrictions on refinancing etc on this product simply blow.
    @banker, I haven’t seen extended rate wars here. Looks like BMO has dictated the termination date of this product from the outset. It seems to me that you’re extrapolating data that isn’t there. As far as I can see, one of the majors is making waves which usually isn’t the case.
    But that is my opinion.

  11. You think that clients out there today are buying your “I’m a professional with connections and strategies that will save you tens of thousands, all while offering a non-competitive rate, kool aid?” Whose phone is ringing off the hook this week, yours or BMO’s?
    I agree that a good mortgage professional is gold but increasingly the consumer today is much less willing to pay more than a razor thin premium for that service and full featured product.
    Coming up with smart ___ responses when a prospective client asks “what’s your rate?” is not professional. You may disagree but my assessments are hardly “out of line”

  12. BMO’s deal is what it is, if the restrictions bother you, don’t take it, if they dont, go for it. It’s just business, no need to get emotional about it.

  13. We do not need to bicker over BMO’s rates.
    What we need is for the lenders that deal in the broker channel to become competative once again. In 2011 the banks would not touch the fixed rates being offered through the broker channel…but that is not the case today.
    By the same token, Broker lenders could not / would not be competative in the variable rates. The Broker partners need to once again be competative or we will not be selling anything.

  14. Banker…………. sometimes you just nail these guys to the wall. The “A” mortgage product has always been closer to a commodity than a professional service. Notice I said closer; it is not a pure commodity at all.
    The truth is BMO is at it again…. because it works.

  15. Question for people. I have a 5 year mortgage with a bit less than 4 years left at 3.5%. I was told by my bank that they would give me a new 4 year at the 2.99% rate blended with my 3.5% which would make it 3.25% for the next 4 years and there would be no fees/penalties etc since I wouldn’t be breaking the mortgage.
    Can anyone see anything wrong with this? I thought about paying a penalty and moving my mortgage to a bank offering the 4 year 2.99% but it looks like the 3 month penalty is equivalent to a quarter of 1% so it would end up the same. Any opinions?

  16. My wife and I are about to buy our first home (we’re renters right now). We are being offered 3.19 over 5 years by TD (fully flexible) and we’re not sure if we should take this or the 2.99 over 5 years (not flexible) with BMO. A third choice would be 2.99 over 4 years with TD. We would likely not be able to put more than 10% down on the mortgage once a year.
    Thoughts?

  17. Ask TD to match or beat the BMO 2.99 offer especially since TD mortgage is a collateral charge (search this site if you do not know what that means).
    A broker should be able to find you a rate better than 3.19 without BMO’s restrictions.
    Somebody shared their experience of getting RBC to give them 2.99% for 5 years after they declined RBC’s 2.99 4-year offer.

  18. Is the BMO’s low-rate mortgage really that restrictive?
    The only meaningful restriction is that it cannot be transferred to another FI before the end of the term.
    The rate is already as low as it gets for a 5-year fixed mortgage so not point to terminate it looking for a better rate.
    If the property is sold before maturity, you are out of the mortgage after paying the IRD penalties, same as with the majority of lenders including all big 5/6 banks.
    If you are thinking of refinancing to get money out of your equity or reduce your mortgage payments, think again. Chances are you will be better off using a line of credit till the end of the term instead of paying the early termination penalties.

  19. There are too many unforeseen reasons why you might need to refinance or leave your lender early.
    Why handcuff yourself with BMO/ Don’t be a penny wise and pound foolish. Pay 1/10% more and get the flexibility you deserve.

  20. Those choices all sound good but if it were me, I would get a broker to find you 3.09% for a 5 year fixed with no strings attached.

  21. BMO sucks. Market share is down bank versus competitors and are very concerned about not growing market share surprise surprise ….they promised (themselves) to be biggest bank in the country a few years ago not even close now so CEO and management look like idiots and trying to be ballsy.Reason…their technology, systems and branch network sucks. Their branches canibalize the same client over and over and management are the same employees who have been there for 40 years no outside talent brought in no brains. Go to TD or Scotia at least they at least have a growing future and if you own the stock dump it

  22. As a broker it is my duty to shed light on all of the details regarding a mortgage product. Many clients have asked about the 2.99% being offered by BMO and when given the FACTS they choose to go with a full flexibility mortgage. If I am doing my job right, I won’t have to bad mouth another product or person, the client will decide what is best for them. Given the 2 clients this week that asked about the differences, both CHOSE to stay at our office and go with the mortgage product we recommended. .. Slightly higher rate than 2.99% for a 5 year, but portable and transferable..the clients choice.. we just provided the facts.

  23. Statistics PROVE that most people do something with their mortgage at or about the 3 year mark. BMO will not allow any changes to be made for the full 5 year term. You get what you pay for people. If someone feels this “limited” product is what they want, so be it, just don’t complain when you are stuck there. I firmly believe that rate is not at the top of the list as far as my top selling features and that works for my clients. Lets not forget the REAL motivation here. Cross selling. BMO is not making any money on this product. This is a LOSS LEADER. They will cross sell the customer to death in order to make up for it. Likely have to set up a bank account and have a monthly fee for that as well. Something has to pay for the branches as well. my two cents

  24. ContrarianB:
    The debt situation in Canada is completely unsustainable. Low interest rates of this nature only empower greater fools within the mass populous to bid up overheated real estate prices which cannon be sustained by eroding incomes in the slightest. We don’t like it, many ignore it because the truth hurts our bottom line. The majority of our industry is made of smiley faced debt enablers selling prime A bank mortgages taking advantage of this generations ridiculous sense of entitlement. Most of this industry will not exist by 2013 only the absolute best will survive and thrive. Why? Because where in a real estate bubble that is popping any day fueled by historically high (astronomical) levels of debt. Every bank in Canada is changing terms to increase their ability to retain the client and increase fees. Why? New applications will sharply decrease after this influx of cheap crack cocaine (I mean mortgage debt) and their profits will fall off as well. The point is we haven’t seen a housing correction in 14 years and suffer from normalcy bias, but this time it’s not different it will be more severe than the eighty and ninety’s. What are we going to do? Develop a strategy that works in recessive times? Play ostrich and stick our heads in the sand? Get into a pissing match about banks doing the predictable? Crisis always breeds the best opportunities but it wipes out the mediocre professional. There’s more smart money on the side lines than ever in history. Why? Because real estate will shortly go on sale and buyers won’t be consumers. They’ll be sophisticated investors. My thoughts. Cheers.

  25. “this time it’s not different it will be more severe than the eighty and ninety’s.”
    Admit that you (like everyone else) know nothing about how deep the next housing correction will be. Then maybe you would have believability. You cant sell fear and doom to educated readers by claiming to know the future. At least add some qualifying statements to your brash forecasts.

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