Wednesday, October 20, 2010

The rate game

I’ve said it before and I’ll say it again. Rate isn’t everything!
I’d like to take a moment to discuss BMO’s “rate special”. It’s a five year fixed mortgage at 3.49%. The rate sounds great, right? Almost unbelievable! My friends, there are a few catches to this one according to Canadian Mortgage Trends. I’ll discuss them below.
1. You are not able to break this mortgage to move to a new lending institution. This is HUGE! If you are not free to break this mortgage and move on to someone else in 2, 3 4 years (or whenever you just plain feel like it) where does that leave you? Do you think you’ll have any negotiating power? I think not.
2. Pre-payments are limited to 10%. Folks, this is the lowest in the industry. I don’t think I have a single lender that has pre-payment privileges that are this bad. Most lending institutions have pre-payment privileges of 15%-25%.
3. Your amortization is capped at 25 years. While this is fine and dandy for some, it’s not for everyone. A lot of first time buyers want a 35 year amortization to keep their payments low for the first few years. The nice thing about a 35 year amortization is that you can pay extra every month (with your lender’s nifty pre-payment options) and can actually make your mortgage payment as if you had a 25 year amortization. The best part? If you have a rough couple months (job loss, have a baby etc) you can always revert back to the 35 year payment. Options are nice to have!
4. 3.49% is not really that great! Let’s compare a mortgage of $200,000 using BMO’s rate of 3.49% and my lender’s five year normal, great rate (no silly pre-payment caps, amortization caps or choiceless contracts) at 3.59%. With BMO your payment would be $997.49, with my lender $1,008.06. That’s a whopping difference of $10.57 a month! Granted, over 5 years that’s $634.20 but you have options, choice and an overall better mortgage in my humble opinion.
What annoys me the most is that the Bank of Montreal just doesn’t provide any of the nitty gritty details on their website!
I am constantly dealing with individuals that only shop by rate. This is a perfect example of why that is a bad idea and why there are several other factors to consider!

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