Just over a week ago BMO executives had issued a warning to mortgage brokers, letting them know that they were going to beef up their mortgage sales force and focus on capturing market share. BMO is looking to kick their growth into high gear in response to feeling the effects of a sluggish market. In this case, their bite was worse than their bark.
BMO is once again offering their 5 year fixed closed mortgage at 2.99%, this is the second time they have done so this year (the first time was in mid January). This rate will be available until March 28th and is available on a maximum 25 year amortization schedule, limited to 10/10 prepayment privileges. Meaning that you can pre-pay/make lump sum payments up to 10% of the purchase price annually as well as increasing your regular payments by 10%.
As a consumer, if you missed the first round of historically low rates offered just two short months ago you’ve now been given a second chance and BMOs offer comes with a considerable 90 day rate hold. Yes, this rate announcement has mortgage shoppers grinning from ear to ear but others (along with the competition) aren’t so excited. The super low rates have drawn criticism from those already nervous about existing levels of Canadian household debt. Yes, today you can afford your mortgage payments at 2.99%, but what happens 5 years down the road if rates are to increase? Are we setting ourselves up for failure?
2.99% Now vs. 5 Years Down the Road at Renewal
The average home price in Canada last year was $360,000 let’s say that you are going to put 10% down and you head to BMO for the 2.99% fixed 5 year rate (yay!):
Purchase Price: $360,000
Down Payment: $36,000
Mortgage Amount: $324,000
Interest Rate: 2.99%
Term: 5 year fixed
Amortization: 25 years
Your monthly payment: $1,531.65
… 5 years down the road upon renewal:
Remaining Mortgage Balance: $276,884.71
Remaining Amortization: 20 years
New 5 Year Rate: 6.28% (this is the average 5 year fixed rate over the last 10 year term)
Your new monthly payment: $2,015.67!
You’ve decided that the budget just won’t allow for a 31.6% increase in your monthly payment, so you refinance your existing mortgage back up to 25 years and now your monthly payment is down to $1,817.87. Yes, this is still an 18.7% increase from where you were with the 2.99% rate, but at least you have a roof over your head.
This is a growing concern amongst those noticing the increasing level of Canadian household debt and certainly you should consider what you can afford today, and in the future before purchasing a home. Speak to a professional and ensure that your own concerns are dealt with and answered!