Monday, March 12, 2012

BMO’s Slap in the Face

Guest Blog by Dan Pultr, Director Sales, B.C.

The squeaky wheels are turning in the mortgage industry once again, not that they truly ever stop.  On the same day that the Bank of Canada announced it would hold the overnight lending rate at 1%, BMO pulled the trigger to start a rate war in the mortgage industry. 

But as frustrating as a rate war may be for the mortgage industry and bank profits, we brokers are silently cheering because this additional publicity will bring a renewed focus to the mortgage market; and the more noise generated by the banks , the more questions and more phone calls we get from clients.  As mortgage professionals, one of our goals is to educate the consumer to ensure they make the very best decision when it comes to their mortgage. 

Keeping with the spirit of education, I think it’s prudent to clarify the criteria surrounding this rate special, and the article in Canadian Mortgage Trends outlines it quite clearly:
  •  A Lower Maximum Amortization:  25 years versus 30-40 years elsewhere
  •   Less Lump-sum Pre-payment Ability:  10% maximum per year (i.e., 1/2 of the 20% that BMO normally allows)
  •  A Smaller Payment Increase Option:  Up to 10%, once per year (again, 1/2 of the 20% that BMO normally allows)
  • A Locked Term:  The Low-rate Mortgage is fully closed unless you sell the property, refinance (with BMO only), or early renew into another BMO mortgage. In other words, unless you sell, you’re not leaving BMO for 5 years, like it or not.
What I find most interesting about this strategy to drive business is the timing and backdrop of it.  BMO decided in 2007 to exit the mortgage broker channel.  As of 2011 its mortgage market share was the lowest among the Big 6 banks, sitting unofficially at $71 billion in comparison to $145 billion the other banks enjoyed.  Most would say that gives them all the more reason to start a rate war, but driving business solely on price has never been the most effective measure, otherwise we’d all be driving Pintos.

What really is most eye opening about this is that BMO has completely disregarded the warnings of leading economists, Mark Carney and Jim Flaherty about increasing household debt levels. 

Even as Mark Carney announced that the overnight rate will remain at 1%, he also said that household debt continues to be the biggest domestic risk.  This comment comes only days after Jim Flaherty was quoted as saying, "I again encourage Canadians to be careful in the amount of debt they take on in terms of residential mortgages because rates will go up some day.”

So while some see this rate war as frustrating, I see it as an opportunity to educate our clients on their options.  However, if I were Mark Carney or Jim Flaherty, I’d see it as a slap in the face.  You be the judge.

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