It is that time of year again....spring market. This is when the majority of real estate transactions occur and hence when the banks tend to get aggressive on mortgage pricing to gain market share. Another 2.99% offer was made by BMO which was in the headlines across various media outlets. My objective in writing this article is to explain the fine print of BMO's mortgage. In 2014 homeowners ought to expect more transparency and explanation from their mortgage professional or bank employee.
Here are the fine print details of the 2.99% offer:
- 25 Years Maximum Amortization: It is advantageous to payoff your home early, however one size does not fit all. If the homeowner, intends to buy an investment property, cottage or a second home in the future, the higher mortgage payment due to the lower amortization would restrict mortgage qualification. Other cases where 25 year amortization is disadvantageous are: self employed homeowner, family that's expecting a child and income will drop due to maternity leave, family that has to support a child through university, single parent, homeowner who is looking to leave their job and start a business......
- Pre-Payment Privileges: 10%. Although the majority of lenders offer 15%-20% pre-payment privileges, I believe 10% is decent since majority of homeowners do not max out that privilege
- Increase Payment Privilege: 10%. Decent but again, not the best in the industry (15%-20%).
- Fully Closed Term: This is where BMO has their clients locked up. The homeowner can get out of the mortgage if they sell the home via bona fide sale (arms length sale) or refinances with BMO. In negotiations, if one has only option or entity to negotiate with they would not be in position to get a good deal. The interest rate differential (IRD) for this mortgage product is punishing since it is 2% below the posted rate (4.99%) and it's equivalent to approximately 4% of the outstanding balance.
It is important for homeowners to sit with their mortgage professional and ask about the cost of getting into the mortgage (interest rate) and inquire about the costs of getting out of the mortgage (penalties, portability, restrictions). A mortgage is one piece of the puzzle in a homeowner's financial plan and it is important to ensure the right product is chosen based on features and not just rates.