Monday, March 31, 2014

Why BMOs rate cut is good news for everyone

By Mark Kerzner, President of TMG The Mortgage Group

Last week BMO announced a cut to its 5-year fixed mortgage rate to 2.99%. This really isn’t a surprise since this is the third Spring in a row that the banks have been cutting fixed rates as a way to kick start the lending season. In both 2012 and 2013, then Minster of Finance quickly spoke against the move. This time, however, we have a new Minister of Finance who has stated that he will stay out of the mortgage market.

And like the last couple of times, the rate cut has given the broker industry a higher profile among consumers.

The first time we saw this offer we might have thought it was a blip, the second year we may have thought it a coincidence. Now that’s it’s happened again, we can safely call it a trend – during the Spring market, pricing seems to get hyper competitive. This is good news for both the mortgage industry and for consumers.

When BMO first introduced a 2.99% fixed rate more than two years ago, we posted a blog titled, BMOs Slap in the Face. Dan Pultr, Vice President of B.C. wrote, “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." 

In March 2013, we again wrote an article about the competitive mortgage market in the wake of BMO lowering its rate, albeit briefly, to 2.99%.

Let’s take a closer look at BMO’s recent 5-year, low-frill special:

  •  It comes with a lower maximum amortization: 25 years max
  • There is less lump-sum pre-payment ability: 10% maximum per year
  • There’s a smaller payment increase option:  Up to 10%, once per year
  • It’s 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.
Combine that with the fact that BMO's interest rate differential (IRD) for early payout is one of the worst out there; consumers may not want to risk being caught should they sell or have to pay out early.

There is, however, one big difference with this year’s rate offer -- the market was already at or near the 2.99% level. In some respects the banks have lagged instead of led.

Once again, the positive aspect is that it raises awareness for the mortgage industry and helps brokers reinforce their value proposition.

The other positive, is that other lenders will likely follow suit and match BMO’s rate or even go lower, which is good news for  consumers. So, whichever way you look at it – BMO’s rate-cutting trend is a win-win situation.

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