The Bank of Montreal created a firestorm in the mortgage industry this week by announcing a groundbreaking special 2.99% fixed rate mortgage. This was important and gained an enormous amount of media attention because for the first time a Major Canadian Bank was making a “posted” five year fixed rate mortgage offer at unprecedented rates. This sent the other majors scrambling to match or meet this offer, and has brought many consumers into the market looking to lower their monthly payments and refinance to lower rates.
The catch, ( why is there always a catch ?!!!) , is what the Bank of Montreal is calling a “No Frills” mortgage. That is mortgage speak for “no way out”, once committed a Bank of Montreal client is only allowed a prepayment privilege of a paltry 10% per year. While it is nice to have the comfort of a long term commitment on your interest rate, it is has been my experience that life changes an awful lot in 5 years. The commitment to the lower rate comes at a price. Our Big Banks are looking for more ways to build a fence around the consumer. These policies have spurred at least one recent Class action lawsuit in Canada this year, with more likely on the way. In fact, because lawyers spearheading twin class-action suits against CIBC over “vague prepayment terms” have fielded interest from hundreds of the bank’s mortgage clients — that a case management judge in B.C. has been assigned to the legal action. The same law firm successfully sued the Royal Bank several years ago under similar circumstances.
The key for consumers is to get a mortgage that matches their individual needs. The deep discount rate will be of no value if you find yourself paying huge penalites to the lender when your circumstances have changed and you need to move on. In fact many of the discount lenders ( including some banks and trust companies) are offering better rates on their 3 and 4 year mortgages with longer amortizations, without the handcuffs.
Always talk to a mortgage professional and get the value of some independent advice, before you lock in and get locked down.