Have you heard the big news? BMO lowers rate their best discounted 5 year fixed rate to 3.49% to encourage Canadians to take an amortization 25 years or less. They claim they want to encourage Canadians to pay their debt off faster….. Sounds nice and in keeping with the Christmas spirit, doesn’t it?
Ok, before we get all warm-hearted and teary eyed, let’s take a closer look at what this really is. First, this IS NOT the best discounted fixed rate in the market. A good Mortgage Broker can get you 3.39% out there with no restrictions on amortization (even lower with some No Frills mortgage products). We all want to pay our mortgage off faster, but choosing a shorter amortization only limits your future options… My recommendation to almost all my clients is to take the longest amortization possible……
It’s not that I want you to have a mortgage forever, it’s about having options…. I always take a ‘what if’ approach…. Follow me for a minute…
Let’s say you had a $300,000 mortgage and you took this BMO 3.49% rate, your payments on a 25 year amortization with be $1496.23/mth. But if you took a truly discounted mortgage at 3.39% with a 35 year amortization, your minimum payment would be $1216.75/mth. You could always INCREASE your payment to accelerate your amortization to 25 years or shorter.
Now, let’s say you lost your job, had some unexpected expense come up, or a financial emergency or just needed to lower your payments. If you chose 25 year amort, then you are stuck with that payment.. if you chose 35 year, then you can always go back to that lower payment… That’s the flexibility that we want. It’s not about taking longer to pay, it’s about having the option to reduce your payment if needed.
LET’S NOT FORGET THE BANKS HISTORY WHEN IT COMES TO RATES
In keeping with the Christmas theme, Mr. Potter would be approve the Banks latest strategy. In case you didn’t know, the 5 year Canada Bond is in record low territory…. hovering at around 1.31%… the 5 year fixed rates are priced from the bonds… the spread is normally around 1.25% to 1.40%… and yet today, the spread is 2.18%…. WOW! and why? TO MAXIMIZE PROFITS. This is has nothing to do with wanting to helps Canadians. 5 year fixed rates should be under 3.00% but they aren’t, because the Banks want to maximize profits.
VARIABLE RATE PRICING IS AT 1990’s LEVEL
Variable rate pricing went from Prime less 0.90%, 3 years ago, to Prime plus 1.00% in during the October 2008 US mortgage crisis, to Prime less 0.75% just six months ago…. to Prime plus 0.20% today. That’s right, Prime PLUS 0.20%. Haven’t seen this pricing since the ’90s. There are no fundamental reasons for this… it’s simply profit taking by the banks.. they are forcing us to take a 5 year fixed rate. Sure, today’s 5 year fixed rates are at historical lows, so there is very little attention being given… but when rates go up, and they will in a few years, we will start to ask for more competitive products and better options other than a 5 year fixed rate…. (Can you see Mr. Potter’s grin getting larger?).
My advice… think about who your banker works for….and who your Mortgage Broker works for….