You know spring has truly arrived when BMO launches their 2.99% mortgage rate! It’s almost becoming a tradition. Last year they even had help in their marketing campaign from the Minister of Finance who berated BMO for offering such a low rate. While the hype around a 2.99% rate is hard to ignore, like any deal, you need to read the fine print before you jump in.
It’s human nature to want a great deal. In fact I would argue as consumers, we have been social indoctrinated to only differentiate a mortgage by its rate. Given the amount of money involved, it seems obvious; right? Not quite. Its not until you evaluate a mortgage by its interest cost instead of by its interest rate do you get a clear picture of which one is the cheapest over the term. Below I’ve shown where some of the hidden costs lie with the “low rate” “no frills” mortgages that in the end often make it a more expensive mortgage.
The “low rate” or “no frills” mortgages are missing 5 main features that 70% of Canadians use:
1. They don’t offer the ability to refinance without a penalty
2. They don’t all offer a portability feature without penalty
3. They don’t allow you to blend or extend your mortgage term without a penalty
4. Most only offer a 25 year amortization
5. Most only allow 10% pre-payment privileges without a penalty being charged.
Statistics from the Bank of Canada show that 70% of all 5 year mortgage terms are either amended, moved to another property or paid out, prior to their maturity. So by not having one of the first three features listed above, you have a 70% chance that you will trigger a penalty. In fact, even if you incurred a three month penalty (with some products it can actually be as high as 12 months) it would be like you got a mortgage at 0.20% higher than your original rate. That would effectively mean that you could have gone out and taken the worst priced mortgage in the market and you still would be further ahead! To put it as an analogy: Its like buying a new car that is 10% cheaper than the similar cars. Sounds great! Here is the catch; items that you use the most like the brakes, tires, and timing belt are only made to last you for half the amount of time of a regular car. If you drive your car only once a week, this might work out well for you. If you drive your car like the average Canadian, this is going to cost you more in long run. The low rate, no frills mortgages are designed exactly like the discount car, and that is why, if you are like 70% of Canadians, you should avoid them.
As always, you should have your mortgage needs reviewed prior to making a decision. Make sure your mortgage advisor talks about your goals, both current and future. From the mortgage review, a seasoned mortgage advisor will be able use their experience to pick out patterns, anticipate your future needs and recommend a mortgage product that will make it all work. They will also show you the total cost, not just the interest rate during the term of your mortgage. For those of you who have been through my Re-View™ process (I call it a Re-View since we don’t just go over your finances, I aim to gain a fresh perspective) you know the level of comfort you get knowing that a big piece of your financial picture is taken care of. If you have a maturity coming up in the next six months I highly recommend going through the Re-View™ process.
On a final note about the low rate products, before you get seduced about by the rate, ask your mortgage advisor for a different perspective. I would be happy to have a chat anytime.
