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Posted January 25, 20121 Comment Interest rates

BMO 2.99% No Frills mortgage needs another look.

It’s January 25, 2012… that’s the original deadline date issued by BMO for their NO FRILLs 2.99% 5 year fixed rate mortgage. Since announcing that 2.99% rate, BMO has reportedly been flooded with calls and applications. And rightfully so. That’s the lowest advertised 5 yr fixed rate in history. (we need to say thank you to BMO… they woke up the competition and the competition answered.. we have seen competitive offers from the non-bank lenders… no restrictions or limitations… This is great news for the consumer.)

This product has also drawn some criticism…There was an interesting articles asking if this product was too good to be true…. click here to see what The Toronto Star thinks.

Let’s look at the restrictions and limitations more closely… If you are 100% certain about the next 5 years in your life, your job, your health, your family’s health, then this may be a great product for you…. But if you look at the stats, we, as Canadians, on average refinance or change mortgages every 3 years… With that in mind, the product can be very costly for the unsuspecting borrower….read on and I’ll explain…

I’m not too concerned with the limited prepayment privileges. The biggest potential risk to borrowers is the inability to refinance outside BMO should they experience some financial problems in the next 5 years. If a borrower runs into financial problems and needs to take the mortgage elsewhere, because they won’t qualify for a BMO refinance, they can’t do it. The mortgage can only be paid out if the house is sold…

An an even bigger problem is the BIG SIX penalty calculation…. let’s say you can somehow refinance in 2 or 3 years with BMO, or you do sell the house and are not porting the mortgage… well, now you must deal with a penalty calculation that makes you pay for the original discount you received at the time of the original mortgage…. And LOOK OUT…This is where we have seen penalties of 6, 9, 12, 14 and even 16 months worth of interest being charged by the Banks to get out of a mortgage..(click here to see how banks calculate their penalties). (hey, Federal Government, didn’t you promise to standardize mortgage penalty calculation 2 years ago??… when is that going to happen?))

And if you need more money added to your mortgage, what assurance will you have that BMO or any other BIG SIX bank, will give you a good rate or a discount on those new monies? None… they certainly won’t have to, given your penalty to exit would be higher than other non-bank lenders… This subject is not talked about very much by the media or by the banks… We will be commenting on this further in future posts…. (hey, how about CIBC and that class action lawsuit over mortgage penalty charges??… I’ll be making some comments on this soon).

Here’s some advice… seek out Lenders that have better penalty calculations... they are out there… they just aren’t as obvious as the Big Six Banks… talk to a mortgage broker and get some comparisons… you might be surprised to know that competitive rates exist without having to give up your future options…

Posted January 15, 201232 Comments Interest rates

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…

Posted December 29, 2011 Case study

Consolidate your debts and save money with today’s record low rates.

It’s December 2011, fixed mortgage rates are at historical lows…a 5 year fixed rate can be had for 3.39% and in some cases, even 3.29%. Does it make sense to refinance your mortgage and consolidate that car loan, student loan, credit card, line of credit or other debt? The answer is an overwhelming YES!

Compounding interest rates are a killer. If you have $20,000 or more in non-mortgaged debt, then you should consider consolidation. Especially with today’s record low interest rates.

Here’s an example of one situation:

	Rate	Balance	Payment
Mortgage	3.99%	$300,000	$1,349
Car loan	6.00%	$24,000	$563
Credit Cards	18%	$10,000	$300
Line of credit	7%	$10,000	$300
mortgage penalty		$2,993	$0
Totals		$346,993	$2,512

And here’s what the new situation could look like after consolidating their debts:

	Rate	Balance	Payment
Mortgage	3.39%	$346,993	$1,533
Car loan		$0	$0
Credit Cards		$0	$0
Line of credit		$0	$0
mortgage penalty		$0	$0
Totals	3.39	$346,993	$1,533

So in this example, we are reducing the monthly payment by $979.00. Let’s take some of that money and put it towards your new mortgage… if you took $500/mth and put this towards your mortgage for 5 years, you would reduce your amortization to 10 years and 7 months. Clearly, this is worth breaking the mortgage and paying the penalty.

(keep in mind, the penalty could be higher if the lender uses an Interest Rate Differential to calculate the penalty… Always speak with your Mortgage Broker to ensure the penalty is accurate).

Posted December 27, 2011 Money saving tips

ING collateral mortgage began December 10, 2011..but no media coverage?

ING made it official and announced that all new mortgage applications submitted on or after December 10 2011, will be registered as a Collateral Charge. Here’s a copy of the circular that was released….click here.

They join TD Canada Trust as just the second major lender to take this step and put the hand-cuffs on unsuspecting borrowers. What’s different about ING’s move is that at renewal time, unlike TD, they will re-register a new collateral mortgage charge, at ING’s expense. Strangely, I haven’t seen any major media coverage on this subject. hmm, does this have anything to do with ING being the largest bank in the world??

SAY GOOD-BYE TO THE ‘UNMORTGAGE’ HELLO ‘MORTGAGE FOR LIFE’

But why should you care? And what does it matter? Well, this is about a few things. CHOICE… they aren’t giving you one. A collateral charge is normally used for loans and lines of credit. There is no amortization. And while that might be good for some, it’s not always good for all. ING says you can refinance without having to incur new legal fees… yes, that’s true..however, you still have to be re-approved for any increase and negotiate your rate. And the truth is, ING, just like all banks, doesn’t always have the lowest mortgage rates….don’t get fooled by their slick marketing ads…

FUTURE OPTIONS. It’s also about your future options… when it comes time to renew, and you want to switch your mortgage to another lender, you can’t… Collateral mortgages are NOT transferable.. you will have to deal with new legal fees… and ING knows this… so do you think they have to offer you the best rate at renewal time?

And speaking of the future, let’s look at a real possible scenario…suppose you need some money in a few years.. You have a great mortgage rate with ING.. it’s 3.64%… or it’s Variable Prime less 0.75%…. and now you don’t qualify for a mortgage increase. With a conventional mortgage, you could always seek out a 2nd mortgage, but now you can’t… No 2nd mortgage lender will register behind a collateral charge. You’re stuck with having to refinance the entire mortgage. You lose, The Bank wins.

For me, ING and TD Canada Trust are not the first choice for mortgage lenders…

Posted December 23, 20112 Comments Interest rates

BMO announces lower rate IF you take a shorter amortization!

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….