BMO’s No-Frills 2.99% mortgage offer is not ground breaking…just another trap by the Big Banks..

EXTRA, EXTRA, READ ALL ABOUT IT…. 5 years fixed No-Frills mortgage for 2.99% by BMO….wow, can you believe it?    Well, don’t get too excited…  At CanadaMortgageNews.ca we  give you the straight talk…  and guess what, No-Frills mortgages aren’t anything new…

I’m giving a BIG THUMBS DOWNS to this product… and you should too…

I’ve had access to these products in the past and we still have access to them….  but I have NEVER recommended it to any of my clients….  the limitations can be too costly and any potential savings can easily be eaten away with prepayment penalties, fees and the inability to even exit the mortgage…. That’s right, you can’t exit the mortgage in many cases…  read on, I’ll explain more..

Make sure you understand how the rates are calculated

Before you start thanking BMO and putting your arm around the banker’s back, you should understand that rates have been inflated for several months… they should actually be much lower…..

Fixed mortgage rates are closely priced to the Govt of Cda bond yields.   5 year Bond yields have been below 1.50% since Nov 1….and have been hovering at around 1.30% since Dec 1.   Historically, the best discounted rates are between 1.25% and 1.50% above the bond yields….  That means fixed rates should be at around 2.80%…. Okay, let’s add in a premium for some market uncertainty….  That doesn’t explain why 5 yr Fixed mortgage rates have not been below 3.29%?

Well, I think Canadians are smart enough to know why the savings hasn’t been passed down to them….  yup, Banks are just maximizing their profits…  And now, this past week, we saw an announcement that BMO was announcing a special low rate…  5 years fixed for 2.99% …  WOW, that does sound great…doesn’t it?    Well, maybe not… let’s take a closer look before giving this product the ‘thumbs up’.

A closer look at BMO’s NO-Frills 2.99% special

There are too many limitations to this product…

-maximum amortization is 25 years.   your prepayment privileges is reduced to and annual lump sum payment of 10% of the original principal balance and you can only increase your payment by 10%.

-90 day rate hold instead of the usual 120 day rate hold.

-you cannot payout this mortgage prior to maturity unless through a bona fide sale…

-you can only refinance the mortgage with BMO and not with any other lender before maturity…. this will all but eliminate your ability to negotiate the rate… a huge loss for borrowers….  ( you can take your mortgage with you if you move to another house but if you need more money, you will have to negotiate the rate… do you really think BMO will give you the best rate at that time???).

-BMO’s penalty calculation… the BIG SIX banks have the worst penalty calculation formula in Canada.   This is one of the biggest kept secrets in the industry… If you had to pay your mortgage early, for any reason.. or if you had to refinance, you would be hit with a penalty calculation that could break your savings account…  That’s because the BIG SIX banks use a formula that makes you pay for your mortgage discount, for the entire term of the mortgage… read this article on how they do it…. don’t get caught having to pay a 10, 12, 14 month interest penalty….  (just worked out a mortgage penalty for a client.. if they stayed with RBC, they would have to pay a penalty of $7,000, if they went with one of our wholesale lenders, they would only pay $2,000.  this penalty calculating formula is similar to BMO).

By the way, the competition has responded and bettered BMO’s offer

There is some good news to BMO coming out with this product…  just as we are writing this, we see that a big lender has come out with a 4 year fixed rate of 2.99% with NO restrictions or limitations…  For us, that eliminates BMO’s Low rate special as a serious competitor in the mortgage market.  But thank you, BMO, for pushing the Lenders…

My advice, stay away from these No Frills mortgage…   speak with your mortgage broker and get full disclosure on this and other products before making any decisions that could end up costing you dearly…

27 Responses to “BMO’s No-Frills 2.99% mortgage offer is not ground breaking…just another trap by the Big Banks..”

  1. Bo Says:

    Are there any banks that offer conventional mortgages at a reasonable rate these days? From my reading, National bank and ING are both doing collateral charges now.

    • SG Says:

      Hi Bo,

      Actually, ING and TD Bank are registering all their mortgages as collateral charges…National Bank is still registering the much preferred regular charges…

      And yes, there are several great lenders out there offering historically low interest rate products… This is a great time to borrow money… interest rates have never been this low… really quite incredible…

      Let me know what you are looking for and I can point you in the right direction.. or if you are not sure what you want, I can also guide you into the best products..

      Remember, the Retail Banks have many clauses that can make your mortgage cost you more than you think….

      Steve

      • Bo Says:

        Thanks, Steve. How is National Bank in terms of their mortgage service? Do they have tricky clauses?

      • SG Says:

        Bo, National Bank service is ok.. I find their branch service more personal than other banks… maybe it’s because most of their branches are smaller.. I don’t know.. but it’s as good or bad as any other. Don’t think they have any clauses that stand out in my mind.. are you referring to their mortgage clauses or line of credit clauses..?

        Steve

    • Trevor Says:

      Can you let me know which lenders provide mortgages that only use the 3 month penalty calculation? And are these lenders rates as aggressive as the big six? What would the rates be? 4 yrs 2.99% with penalty only being 3 month interest? Thanks

      • SG Says:

        Hi Trevor,

        I’d be happy to disclose this info you… There are a number of non-bank lenders out there… Firstline, MCAP, First National, just to name a few…. don’t know who these lenders are? That’s probably because you never dealt with a mortgage broker…

        These lenders advanced almost $30billion in residential mortgages last year… Their penalty calculations are not based on your original discount, like the BIG SIX banks.. they may still us an Interest Rate Differential when calculating your penalty, but the interest rates would have fall dramatically for this to happen….

        Compare this to the BIG SIX Banks and they will always use the original discount given to calculate your penalty… even today, a $200k mortgage, if paid out in 2 years from now, with rates staying the same, would cost you around $7,000 in penalties with any of the BIG SIX banks… but only $2,000 with these lenders…

        Call me if you want more info.. happy to help…

        Steve

      • Ron Says:

        Trevor…RBC offers the 3month interest rate differential on Variable rate Mortages

      • Steve Garganis Says:

        Thanks Ron.. yes, most all Variable rates offer 3 mth prepayment penalty… I’m only referring to fixed rate penalties in this article… RBC’s penalty calculation is terrible.. there are better ones out there and you don’t have to give up on rate.. in fact you may do better on rate…

        steve

  2. Bo Says:

    Mortgage. What banks, in your opinion, are GREAT in terms of morgage services? 🙂

    • SG Says:

      Hard to say Bo… the problem with the banks is that they keep changing their internal staff… so just when you get to know someone, they move them to another position or location…. I would say my best experiences have been with TD, National Bank and CIBC…

      Hope that helps…

      ps… i would probably steer clear of all the BIG SIX banks when it comes to a mortgage… i would go with the non-bank lenders.. they usually have great service and better terms…

      Steve

      • Bo Says:

        Thank you for your advice, Steve.

      • redeem147 Says:

        Most time people move in a bank it’s because they’ve chosen to, not because the bank is playing checkers with them.

      • Steve Garganis Says:

        Hi, I’m not sure I agree… I have many examples of people that went to a bank for their mortgage… they got a great interest rate or some free bank services… but then they had to refinance or pay the mortgage out early for some reason (this happens a lot more than most of think)… and then you can’t leave early because of the prepayment penalties… this BMO mortgage is even worse…it does NOT allow you to leave for the duration of the term…

        This isn’t checkers, it’s more like chess.. and bank has a team of legal experts and govt contacts on their side… the borrow doesn’t have a chance…

        It’s worth mentioning that exactly 2 years ago, the federal govt announced they were going to bring in legislation to standardize mortgage penalties… as of today, no changes have come into effect… I wonder who this benefits?? the banks or the bank clients??

        Steve

  3. Wally Says:

    Steve, I have a daughter buying for the first time.

    Does the 4 and 5 year fixed rate term mortgages
    workout best in coinciding with the U.S. presidential elections??

    • SG Says:

      Hi Wally,

      Good point… you know your history..

      Historically, we want our mortgages to mature around or prior to a U.S. election year… rates mysteriously drop leading up to an election in the U.S. And this usually spills over to Canada… another reason to consider the 4 yr term vs the 5 yr term…

      Steve

  4. Trevor Says:

    Thanks Steve. But can Firstline, MCAP, First National offer 2.99% for 4 yr fixed?. Having the better penalty calculation may be outweighed by a higher rate. What is the best these lenders can offer?
    Another comment…I have my mortgage with BMO, and when I refinanced, they gave me full discounting on the new money added to my mortgage. Have you had experience of people not getting a discount, or just an assumption that they do not discount? I want to know so that if I refinance again, I know what I am getting myself into. thanks

    • SG Says:

      Trevor,

      Yes, we have 2.99% with one of the those 3 lenders I mentioned.. it’s NOT a No Frills product.. it’s a regular mortgage…

      Yes, I have seen all of the Big Six banks refinance clients mid-term and NOT offer the best discount… Think about it… with this new No Frills mortgage, BMO knows you can’t leave them until the 5 yrs are up… what incentive will they have to offer you the best discounted rate mid-term, should you need to refinance?

      There is not incentive… you must go on trust and faith… and sorry for saying so, but I’ve seen enough situations where faith and trust didn’t pay off….. the Personal Banker got transferred or promoted or hit by a car…. the new Banker has a different agenda… or the Senior Manager isn’t focused on volume anymore but on profit… (just look at CIBC’s announcement late last year where the president said they would not compete on rate but on service)…

      This happens regularly… Banks and other lenders change their focus routinely… the key is not to be trapped…. don’t put yourself in a situation where you lose your negotiating leverage… where you lose your options… where you lose your flexibility…

      After 22 yrs in this business, and working on some 9,000 mortgage applications, I can tell you one thing… if it isn’t in writing, it’s not guaranteed…

      Just be careful… Let’s see how this plays out in 2 and 3 yrs… we will be watching..

      Steve

      • Trevor Says:

        Are you telling me that you have lenders that will guarantee that when I refinance with them, they will give me the “lowest” rate possible? And sorry for being green here, but if I am mid term with any lender, and I ask for a refinance(or move homes), and I do not like the deal they have offered…Am I not stuck anyway? Whether the penalty is IRD with discount, or IRD without discount, the penalty is still BIG, and not worth paying…therefore STUCK! There is risk and reward with every lender….If I am putting 5% down payment, chances of refinancing in the next 5 yrs are 0%! There is no equity in my home to take! The BMO 5 yr 2.99% is portable, so no big deal if I move homes…The rate is 2.99%…lowest in history! Why would I not at least consider it??…I am not saying the 2.99% 5 yr does not have its limitations, but I also do not think it is fair to bad mouth my bank by saying it is a horrible product! And really, we all know badmouthing your competition just makes you look bad in the end). Variable rates are not for everyone, and neither is this product. I think that only thru a one on one conversation with your bank will determine if this is the right product for you. And MY bank(BMO) can also offer 4 yr 2.99%, so please don’t make it sound like your 3 lenders are the only option. It sounds like “someone” might be a bit bitter that BMO is offering this product to the public!

      • SG Says:

        Hi Trevor,

        You make some great points and comments…. I’ll try to clarify further..The problem that I have with BMO’s NO FRILLs mortgage and any other NO FRILLs mortgages is that you are giving up too much… see below.

        -yes, there really are lenders out there will offer you their best rate at time of renewal and refinance.. but let’s suppose they didn’t… you could always leave mid-term and pay a more reasonable penalty based on a more reasonable penalty calculation than the BIG SIX Banks….
        I must correct your comment that the penalty will still be Big no matter which lender you deal with…. Not True.. and it’s important to clarify this point as most Canadians don’t understand this until it’s too late……

        The BIG SIX Banks are using a formula that incorporates your original discount at the time of taking the mortgage… this makes Bank penalties much higher than they used to be and than they should be (read the article above showing a simple example of a $7,000 penalty vs a $2,000 penalty)… if you take the BMO NO-FRILLS mortgage, you can’t leave mid-term unless you sell your home… yes, you can still refinance but at what rate?? what incentive does the bank have to give you a good discount?? you lose your leverage to negotiate the rate. Lost that and see what rate you get..

        -you also mentioned that if you buy with 5% down, then the chances of refinancing in less than 5 yrs is nil… well, maybe, but maybe not… we have seen house values almost double in the last 5 yrs… I would never say never on this point… and again, why tie yourself into restricted product?

        -this isn’t bad mouthing BMO, it’s a wake up call to Canadian borrowers that there are much better alternatives when it comes to fixed rate mortgages… Right now, the BIG SIX banks don’t have good penalty calculations… there are better alternatives…

        -a one on one conversation with a qualified professional is a must and I agree that no one product fits everyone… however, if we are talking about getting an analysis, I don’t see how one Banker could give me a fair and unbiased review.. will they be able to tell me about their competitors products? of course not… you can only get this from a Mortgage Broker..

        -I wouldn’t take or recommend a 4 yr fixed with BMO.. for the reasons above… penalty calculations could cost you dearly…

        -last but not least… this is not a bitter article.. it’s an opinionated article that is meant to draw attention to real life possibilities.. I have seen too many Canadians hit with enormous penalties or forced to refinance into higher than expected rates.. Keep your option to negotiate open and you’ll probably do okay..

  5. Christal Says:

    Question…what is your opinion of obtaining mortgages from other financial lenders–non banks–such as HSBC and other companies that filter into the “finance company” label?

    • SG Says:

      Hi Christal,

      HSBC is a bank with similar prepayment penalties as the BIG SIX banks.. if you are choosing a fixed rate term, then be careful… I would not recommend their fixed rate products…. look to other non-bank lenders with more favorable penalty calculations… you probably won’t need to sacrifice on the rate and in the end, you will have less exposure..

      HSBC also owns HSBC Finance.. they are funds high risk borrowers and also funds department store purchases… just to clarify.. this is not where we’d go for any mortgage financing…

      Steve

  6. Brian Says:

    Thanks for the unbiased pov Steve. Your blog is refreshing.

    • SG Says:

      Many thanks Brian….

      Am getting emails from Bank clients sharing their bank penalty horror stories… the penalty calculations are unfair and costing Canadians $$millions every year… Banks are loving it… where’s the Fed govt with their promised mortgage penalty standardization…? promised 2 yrs ago and no further announcements…

      Steve

  7. Mohammad Says:

    Hi Steve,

    Thanks for all the discussions on Mortgage. My mortgage is going to open in three months and I have started doing research on different rates, conditions and restrictions. Last time I was (and still) with BMO with 5+% fixed for 5 yrs and was not too happy with it. I have talked with couple of mortgage brokers.
    One suggesting 2.94% with CIBC for 4 yrs fixed regular mortgage.
    There is another option at 3.88% for 10 yrs with ING
    also have BMO 2.99%.

    I am thinking of talking to first National bank too.

    This time I want to take an educated decision with the rate and conditions. I will appreciate your suggestions. Thanks

    Mohammad M

    • Steve Garganis Says:

      Hi Mohammad,

      Getting more opinions and information is never bad.. I think you are doing the right thing.

      Let me give you a little more info and some things to think about.

      First off, 4 yr fixed rate, 5 yr fixed rate and 10 yr fixed rate may be good options… The real question to ask is, “which one of these terms is right for you?” Which one of these products is right for you…? I can’t answer this question based on the info you have provided.. I would need to have a better look at your financial profile..

      I’d be happy to discuss your options in more detail…

      Here are some things to look out for….

      -how is your next lender calculating their prepayment penalties? you better know, even if you don’t plan on selling or refinancing your mortgage prior to maturity… the costs here could be extremely dangerous…

      -do you plan on selling soon?
      -do you plan on buying another home soon?
      -do you own other properties?
      -do you expect any large sums of cash in the next few years?
      -do you want to buy other properties in the future?
      -is your income salaried, or are you self employed?

      This is just a partial list of the questions I ask… I must know my client’s situation before i make my recommendations and provide the best strategy…

      The ultimate goal is to pay the least amount of money to own our homes….

      Contact me anytime…. 416 224 0114 or steve@mortgagenow.ca
      Steve

  8. Alberto Says:

    Hi Steve,
    Our mortgage is with BMO and our rate is 2.99. We need cash for renovation and we are refinancing about $35,000. Our mortgage balance is $119,000.
    Here is what BMO has offered us:
    -Rate 2.99 fixed for 5 years closed.
    -We still have 20 years to pay… And the bank pushed us to refinance for 25 years which we refused and made it for 20 years.
    -Penalty is $750. When asked about calculation, we were told that it is based on several things but no demonstration.
    -Notary will cost us another $1000,00 (I understand that this is not banks’ issue)
    Here is what I would like to know
    -are we getting a reasonable penalty
    -my mortgage was already 2.99 for 5 years which was renewed only couple of months ago.
    -should I ask for discounts
    Also, note that we have an excellent credit.
    Thanks in advance,
    ALBI

    • Steve Garganis Says:

      Hi Albi,

      thanks for you inquiry…your penalty seems about right… 3 months interest… can’t escape that… but there is something we can do with the legal fees… drop me a line and I will give you some options to consider that will save on the legal fees… I have a lender that offers to pay the legals and gives you a great mortgage product with a very competitive rate.. end result, you will save more money…

      Steve 416 224 0114 steve@mortgagenow.ca


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