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

  1. Is this not akin to redlining? By limiting the AM to 25 years, they’re essentially charging young buyers more to buy in places like Fort Mac, Toronto and Vancouver, even though CMHC will guarantee the loan regardless of amortization or location.

  2. I would say that not being able to payout the mortgage early is pretty restrictive. Nice rate but sounds like an Industrial Alliance type product.

  3. This is a great start to see movement in the fat spreads that exist today with lenders.
    We should see other lenders move so that BMO’s restrictive (sales clause payout) mortgage isn’t the best option.
    And remember… 2.99% is now the rate that client qualifies at with this mortgage! so possibly bigger mortgage or easier qualifying!

  4. Hey Pete, it’s RBC. Not as restrictive, 25 year Am, 90 Day Rate Hold, can refi or payout without selling or being tied to RBC only.

  5. So, can someone explain how the variable rate works? So I get a variable rate, and when does it go up when does it go down?
    Does this mean that all the people that got a variable of prime -0.70 etc and now getting prime +0.10 or something similar?

  6. Alex, e.g. variable is prime -0.7% if you got that deal last year, it was offered for 5 years. The prime moves usually when bank of Canada changes its prime rate, so your mortgage rate changes at that time. If your bank doesn’t move prime rate then your mortgage stays the same. It can go up or down, right now the trend is for it to go down by 1/4% soon.
    Ones your term of 5 years is up you will have to negotiate another term and it might be something else at that time that is a better deal. Hope it makes it clearer now.

  7. You get a variable rate to day.
    “Your rate” = “Prime rate of your bank” +.1%
    simple formula, you see it depends of the “Prime rate of your bank”
    And the Prime rate of your Bank is usually 2% more than “Bank of Canada rate”.
    Every once in a while BoC decides what the rate will be and the banks adjust their rate, but not always.
    If this is still too confusing, you better speak with your bank or mortgage adviser. They will explain you in more detail for free :)

  8. That’s true Darren. For example: someone at 2.99% can qualify for a roughly 3% larger mortgage than someone paying 3.29% (based on 5% down, $60k income, minimal consumer debt, and a 30yr amortization; OAC).

  9. Are these low rate fixed term mortgages the collateral mortgages these banks are offering now on all conventional mortgages. Good thing to look into.

  10. Arby , 100% pure BS my friend, i work at RBC mortgage sales have the email for the the match on BMO, its identical as BMO in respect to conditions, nice try

  11. A commonly forgotten fact is that Big 5 posted rates have stayed far higher than “special” low rates over the year. These deep discounts work their way into the penalty calculation on the back end, leading to potentially HUGE penalties during mid-term liquidation (even if, as with the Royal and BMO offerings, this might only be allowed with a sale). The increased “security” of an ultra-low fixed rate is ironically linked with the peril of a potentially huge penalty. My advice to those taking a 5-year fixed would be to take into account the way an IRD is calculated at different lenders.
    Most who opt for a fixed rate are concerned that inflation or the bond market will eventually cause rates to rise (conceivable) in the next couple years. I don’t share this conviction, but I can respect it. For these people, a far more attractive rate is ING’s 3.99% 10 year rate. This is especially impressive when you consider the Canada Interest Act 10(2) rule which allows you to be IRD-free after 5 years. Since taking this rate implies a 1% higher borrowing cost for the first 5 years, it definitely isn’t for everyone. But for those certain that rates will be going up past the point of comfort, this is as safe as it gets with little downside after 5 years. Food for thought.

  12. Good information Whistler. My advice to those taking a 5 year fixed is simpler. Don’t take a fixed unless you are reasonably assured you are in it for the full term.
    Penalties are often punishing for anyone breaking any kind of fixed contract (Alarm service/Car lease/Insurance/Gym membership/Cel phone plan) and a fixed, closed mortgage contract is no different.

  13. RBC just matched TD’s 2.99% 4 year fixed, available until February 29th, 2012, no restrictions… fund by April 30th, 2012.

  14. This BMO mortgage could be a trap for some, if they are being qualified for the loan at this low rate. What happens at renewal 5 years from now when the rate is 6.0%?

  15. On a 300k initial mortgage, the payments would go up by $400 at renewal.
    If the income hasn’t increased over those 5 years to afford such increase, then you have other options like resetting amortization back to 25yrs making for a payment increase of $220.
    or were you being satirical? because if someone can’t afford that kind of modest increase on renewal, they have bigger problems than 6% mortgage rates!

  16. So are all variable rate mortgages the same? I mean are they all without restrictions? If i get one, can I lock into a fixed rate at any time?
    What is the current lowest variable rate available on the market? (Ontario).
    I dont think that there is a point in taking a fixed rate now since rates will not go up for probably another year (Is what I gather from reading)

  17. There’s much confusion in you Alex. And this isn’t “mortgage basics forum”. Meet an adviser or just search the site before asking questions.

  18. I am sorry. I just want to learn more. I am scared that the broker will tell me what is better for them and not better for me.

  19. Hi Alex. I will happily try to answer your questions.
    “are all variable rate mortgages the same” No, but often similar.
    “If i get one, can I lock into a fixed rate at any time” Depends on the lender. Some allow it, some don’t. Some allow it at a certain point, say after 3 years into the term.
    “current lowest variable rate available on the market? (Ontario)”
    Sorry, not my specialty
    “I dont… taking a fixed rate now since rates will not go up for probably another year” Your decision to take fixed or variable should depend on your circumstances, not your gut feeling. My crystal ball is about as accurate as yours.
    I hope it helps as a trusted and reputable mortgage advisor would.

  20. MS, are you sure it’s prudent to think that at renewal 5 years from now the rate could be 6.0%?
    That would imply that bond yields are somewhere north of 7%. Simply not happening. Why?
    Consider this analogy: About 10 years ago, the price of oil was trading at $20-$30 per barrel, or thereabouts. Would it be prudent for a business (or consumer) to make their plans assuming the price of oil goes back there in 5 years, back to where it used to be? Of course not! The world has changed in ten years.
    Same thing with interest rates – we’re in a new environment, and to think that interest rates will jump from 1.3% to 7.3% in five years is not only imprudent, it could actually be financially harmful to plan like that. Just because that’s where rates were ten years ago, does not mean that we’re bound to get back there.

  21. Dan I think you’re confused. 5yr bond yields are always less than fixed mortgage rates. A 6.00% 5yr fixed rate implies a 5yr bond in the 4.50% vicinity.

  22. Fair enough. Still, would be a massive move to see 5-yr bond yields more than triple to get to that 4.5% level. They haven’t been at that level since 2003 (except for a few weeks in ’07), and those days were long long before the flood of money being poured in to the system by central banks, as the global financial system undergoes a massive deleveraging.
    Did you guys know that, for example, Germany’s 1-year bond yield was actually negative the past few weeks? And the German & US 5-year bonds have been yielding less than 0.8%. Meanwhile, the Swiss and Japanese 5-year yields are at about 0.3%. Just some food for thought.

  23. Alex. I am sorry to hear you think that a mortgage broker would work for them instead of you. Also another misconception.
    Do you also feel that a lawyer works the other party instead of you?

  24. Thanks for posting Whistler. Regarding posted rates and IRD penalties, that’s certainly often true.
    For those who aren’t aware, the reason it’s true is because higher posted rates at origination mean a bigger “discount from posted.”
    Some lenders (such as the Big 6 banks) use that discount from posted to calculate their effective “comparison rate” when determining one’s penalty.
    In turn, a bigger origination discount often leads to a lower comparison rate. The lower the comparison rate, the bigger the IRD penalty.
    For reasons such as these, someone who might break early is well advised to consider non-bank lenders and smaller lenders who don’t use posted rates in penalty calculations.
    On the other hand, if rates do rise in the next few years, it will make IRD penalties less of a factor.

  25. Hi Alex,
    You ask some important questions. An experienced mortgage adviser is your best resource because there are subtle nuances that may impact what’s most suitable for you. Those only become revealed after a review of your circumstances.
    Moreover, there’s a wide array of mortgage features and restrictions to consider. A 1-on-1 consultation is most efficient because you’ll invariably have follow-up questions to any answers posted here.
    If you don’t feel confident in your current adviser, search for another one you can trust. There are thousands of excellent mortgage planners all across the country. Finding a good one can save you time and money.
    I wish you the best…

  26. Great site you have created here – are there any guesses on when we’ll see the bottom of the rate reduction curve? How will we know when the low rate offers will dry up? (not including the 2 week offering by BOM) I was planning to break my present mortgage in the spring, but I’m tempted to do it sooner. If I wait, I might regret it. Thoughts?

  27. $1,818/$1,418 is a 28.2% increase, equivalent to a 5% raise every year for 5 years. This is a reasonable expectation for a newly graduated professional, but not for the majority of Canadians. Most would be able to “afford” the increase, I suppose, but they’d be spending a greater fraction of the income on the house AND paying off less of the principal every month.

  28. Brokers do look out for themselves first before the customer. I used to work for one of the big 5 and close all the broker mortgages and what mortgage did I see more often then not? The five year fixed. So I began to ask myself why am I closing all these 5 year fixed rate mortgages? Because that’s the one the broker makes the most on. a 5 year fixed rate is not for everyone! You have to look at the big picture and think long term.
    While the rates look great at 2.99% for 5 years, what kind of rate will you be looking at maturity? I encourage you to look at some of the shorter (1,2,3 years) and longer term (6,7,10 years) because they are historically low. Peace of mind is important for a lot of people and having a mortgage for 10 years at under 4% would provide many with that (and there are no IRDs as another poster mentioned after 5 years).
    I’m not saying all brokers are bad. There is a use for them if you have had financial difficulty in the past (ie. bankruptcy, bad credit score) and they do help put people in homes who wouldn’t qualify under conventional lending guidlines. Educate yourselves when you shop for a mortgage and look past the current rate and think about the long-term.

  29. Since BMO doesn’t deal in the Independent Broker channel, are any brokers getting other lenders to match this 5 year fixed deal yet?
    If so, is anyone getting better conditions?

  30. Dear Pedro:
    You are off on so many counts. It’s sad that a bank entrusted you with any part of the mortgage transaction.
    The 5 year is the most popular term in Canada. Naturally customers will choose it more than any other term.
    Are you trying to mislead people into thinking the banks sell fewer 5 year mortgages? That’s laughable (and a lie)!
    The truth is that brokers sell more money-saving variable rate mortgages than banks, and they have for years. I doubt you even worked in the capacity you claim or you would know that.
    On your point that brokers are primarily good for people who don’t qualify, what a faulty and distorted statement! Mortgage brokers are beneficial to all homeowners because they weigh the best options from numerous lenders. Why take only the mortgage that your bank can sell you? It’s crazy not to compare the rest.

  31. For 5 years no. Remember, this offer has quite a few restrictions so lenders who don’t typically dabble with the no-frills crap won’t offer it. Rob actually mentioned this already. 2.99% is available on some 4-year fixed deals but not 5 years. I feel bad for the people who would rush to get this mortgage. They better stay put for 5 years and make very few prepayments because otherwise all the rate savings would be wiped. And since 60% of those who take a 5-year mortgage refinance early (insider facts), this promo has the potential to be a huge cash generator down the road for BMO. If the client won’t pay a huge penalty they’ll pay the piper when they blend the rate. The media hasn’t exactly been doing a good job either, they cover this as the bargain of the century.

  32. Oh and banker, technically if a broker has a relationship with a BMO MS they could send the client over to BMO to take advantage of this. BMO in turn sends you turn-down business.

  33. Lior, your extreme response remind me of a car salesman that regardless of client need, only markets premium, fully loaded cars. Like a BMW salesman trash talking Kia’s and how they will fall apart before anyone gets one home.
    The BMO low-rate Mortgage is a low frills, not a “no-frills” mortgage.
    Considering that only 17% of borrowers utilize the prepayment feature of their current mortgage and much less to maximum benefit, trashing 10/10 prepayments is weak. As for refinancing, the top reasons in recent years was people liquidating some of their house appreciation or taking advantage of falling rates. With record low 2.99%/5yr fixed, slowing appreciation and gov’t changes on refinancing/amortizations, the many restrictions on a low-frills mortgage today are less relevant to the growing segment of value seeking, price conscious people. BMO recognises that. Do you?

  34. Good points.
    Who wants to pay for the features they do not need?
    The biggest problem is the high early prepayment penalties as with all big banks that have inflated “posted” rates.

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