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…
The more I think about it, the more fired up I get! OSFI (Office of the Superintendent of Financial Institutions) has come out and said Bank profit margins are shrinking and the BIG Banks may start to loosen their credit lending policies in order to write more business and therefore earn more profit.
This statement just doesn’t make any sense…. let’s think about this for a minute… Take a look at Financial Post’s Biggest Companies ranked by profit in 2010.…let’s see where the Banks rank:
– #2 is RBC $5.2 billion
-#3 is TD Bank $4.6 billion
– #4 Bank of Nova Scotia $4.2 billion
– #9 Bank of Montreal $2.9 billion
– #12 CIBC $2.4 billion
Five of the top twelve most profitable companies are Banks!!! This doesn’t look like the Banks are hurting that badly, does it? We should also not forget that the govt has made several changes to mortgage lending rules…It’s already harder to qualify for a mortgage and line of credit… So what gives, OSFI??
Look, OSFI has spoken and we must not ignore this….I don’t like what they are saying and the logic they are trying to give us doesn’t make sense….But we can’t bury our head in the sand either… The Banks have too much power… We should prepare ourselves for changes… Make plans and adjust accordingly… Don’t wait for the Banks to act.
It’s clear to me that we could see some changes in lending policies…My guess is this will translate to some increased rates on your secured lines of credit, a possible review of your account, even a reduction in your limit… That’ right, the banks can even call your line of credit and ask you to repay it in full…!! They might ask you to lock into a fixed rate mortgage or get into an amortized repayment schedule instead of just paying interest only.
But it doesn’t end there… commercial accounts will also be under the magnifying glass, in my opinion. Commercial loans and mortgages get reviewed annually by the Banks…This is why it’s very important to choose your commercial lender carefully… Not all Banks are alike… there are some institutions that offer commercial loans that are not callable…
Bottom line is to be aware, stay informed and act accordingly…. If you are not sure where you fit in with these possible changes, give me a call.. I’m happy to help.
Nothing new about this story…. Since April 11-2011, the 5 year bond yields went from 2.87%, down to 2.10% on June 24th, and have gone up slightly to 2.34% on July 1st…. Remember, fixed rates are closely tied to the govt of Canada bond yields…So that means the Banks would have lowered their fixed rates accordingly and then raise them slightly, right?
Well, not really… On April 11th, the Big Six Banks posted rates were 5.69%.. they went down slightly to 5.39% recently but are back up to 5.54%… What’s wrong with math…? Why didn’t the Banks reduce their rates accordingly? It’s called MAXIMIZING your PROFIT… The banks want to earn a little more at the borrowers expense.
I find it kinda funny but also frustrating when I see articles reporting that Bank profit margins on mortgages is shrinking… The spread between the 5 year bond yield and the posted 5 year fixed rate is around 3.20%… and historically, it’s been around 2.50% and sometimes even as low as 2.00%…. Where’s the fierce competition, I wonder?
Banks are a business that want to maximize their profits… Let’s not forget this.
Some things never change…..On Oct 19th, 2010, the 5 year Canadian Bond yield was 1.85%… It fluctuated up and down but staying below 2.00% until Nov 5th when it closed at 2.053%… We were expecting the Banks to adjust their Fixed rates downward but it didn’t happen..
Since then, it has kept above 2.00% and is currently at 2.27%…. This increase in the Bond yield usually means Fixed Mortgage Rates will go up.. See the chart here.
But earlier this week, the Big Six Banks lowered their posted 5 year mortgage rate to 5.19% from 5.29%… This is just a delayed reaction the low bond yields.. but it just goes to show that the Banks continue their pattern of reacting slowing to lowering rates but move like Formula 1 race car to raise rates..
Of course, Posted Mortgage Rates really don’t mean much as the Wholesale Market or Broker Market deals with the true rates.. And Fixed rates dropped late last week to their lowest levels ever. … 5 year fixed rates are now at around 3.49%… with some Lenders even offering 3.39%… WOW!
Watch for Fixed rates to move upward slightly as the Bond yield is now high enough to warrant an increase…
In case you’re wondering how the G20 Summit affected Canada’s mortgage business…. Most Lenders have their head offices in the heart of Toronto… and most all of them issued notices that turnaround times and disruptions may occur…Fortunately, Lenders have back up plans because of past emergencies likes 9-11, SARS and the Blackout.
Oddly enough, the Big Six Banks all lowered their Retail mortgage rates over the past few days…. 10bps is not a big drop, but any rate drop should be welcome news to all Canadians.
- Posted 5 year fixed rate is 5.89%. This is also the qualifying rate for mortgages with less than 20% down payment and terms less than 5 years and for Variable rate mortgages…..
- The best discounted 5 year fixed rates seem to be around 4.39%…
- No changes for Variable rate pricing… Big Six are advertising Prime less 0.35% as their best but wholesale rates are at around Prime less 0.60% and sometimes better.
- Big Banks giving big push for Hybrid mortgages….and although I’m not a fan of these products for most of us, there may be a place for them for some of us….just make sure you are fully aware of all the pros and cons of this product.
Just a personal comment about the G20 Summit… as someone who was born and raised in Toronto, I was saddened by the images that flashed across our TV set…police cars on fire…broken windows, masked protesters…This isn’t a true reflection of our city…our city has the reputation of being one of the cleanest, safest and friendliest in the world… I hope that message made it’s way to the rest of the world….