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More on BMO’s Low-Rate Mortgage

BMO launched its Low-Rate mortgage on March 2, 2010 and no other bank has routinely advertised rates as low on a 5-year term.

That makes this product a visible differentiator for the country’s fourth largest bank and, as a result, clip_image002Frank Techar, BMO’s President and Chief Executive Officer, Personal and Commercial Banking Canada, says BMO continues to see strong demand for it.

“The reaction from Canadians to this mortgage has been fantastic,” he told CMT.

“Over the past two years, we have built a portfolio of $6 billion in low-rate mortgages…and we expect demand to remain strong.”

Not surprisingly, being the only bank with a transparently priced 5-year fixed pays dividends. If nothing else, it gets BMO’s phones to ring.

“The low posted rate on this product has been great for driving customer interest,” Mr. Techar says. He notes that BMO developed this mortgage because customer feedback indicated “they wanted an easy-to-understand, straightforward product.”

Once it engages a new client, BMO aims to create a relationship. From there, it can recommend a different product if it’s more suitable than the Low-Rate mortgage. (We suspect there’s a degree of upselling involved—as well there should be since more flexibility warrants a higher rate.)

A point of interest on that note: BMO mortgage specialists have told us in the past that it’s sometimes possible to get regular BMO mortgages (without the Low-Rate restrictions) at similar rates. Sometimes, all you have to do is be well qualified and ask. Albeit, don’t expect to get a regular 5-year BMO mortgage at its new 2.99% promotional rate.

As a consumer, it’s worth examining all possible alternatives, if only because the Low-Rate mortgage has strings attached. For example, you cannot:

  • Refinance with, or switch your mortgage to, another lender before maturity
    • Although, you can renew early, refinance to another BMO mortgage, or transfer your mortgage to a new property.
  • Get an amortization over 25 years
    • Mr. Techar says: “According to our research, nearly 75% of Canadians looking to purchase their first home are considering an amortization of 25 years or less.”
    • That said, extended amortizations are suitable in specific circumstances, and a 25-year cap is a deal-killer for a minority of borrowers.
  • Get BMO’s normal prepayment privileges
    • Prepayments are limited to 10% lump-sum and a 10% annual payment increase (BMO’s normal prepayment options are 20%/20%)
  • Have a Low-Rate mortgage under a BMO ReadiLine line of credit
  • Get a Low-Rate mortgage on a non-owner-occupied rental property

It’s fair to wonder how a departure from discretionary pricing (albeit a limited one in this case) will affect BMO’s earnings. We posed this question to Frank. His position was: “We believe that a more knowledgeable customer is a more confident customer and a more loyal and more profitable relationship.”

“Competition is good,” he adds. “It demands that bankers innovate and benefit consumers.”

Those competitors (lenders and brokers alike) are certainly watching. In fact, many of them key off the Low-Rate mortgage when setting their own pricing.

BMO is not the first Big 6 bank to offer an everyday low rate pricing model. In 2003, TD launched a product called the “Best Rate Mortgage” with a discounted and fixed “no haggle” rate. It later pulled that product from the market.

Rob McLister, CMT