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Is a 2.99 mortgage too good to be true?
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By Madhavi Acharya-Tom Yew
Bank of Montreal made headlines with the 2.99 per cent five-year mortgage it unveiled last week.
Most of the other big banks have followed suit, but before signing on the dotted line you should read the fine print. These mortgages have restrictions that you won’t find on other products.
“It’s the lowest rate available but I would only recommend it to people who are very sure of their circumstances for the next five years,” said Kerri-Lynn McAllister of RateHub.ca, a Web site that compares mortgage rates. “You may want to look at a slightly higher rate that offers all the flexibility of a standard mortgage.” [More: Real estate: 10 things you need to know]
The Bank of Montreal says this mortgage offers Canadians a way to be mortgage-free faster because it offers a great rate and a shorter amortization. But it differs from a typical mortgage in several ways.
1) The maximum amortization period is 25 years. A typical mortgage offers an amortization period of up to 30 years.
2) You can make as lump sum payment once a year equal and increase your monthly payments as long as the total doesn't exceed 10 per cent of the principal amount owed. Most mortgages let you make monthly and lump sum pre-payments of 20 per cent or more.
3) You cannot skip or double-up on a payment.
4) You cannot refinance or switch your mortgage to another lender for five years. Most home owners who sign a five-year term don't make it that long. On average, they last three years and 9 nine months, and then they either refinance or move.
McAllister said that because the amortization is capped at 25 years, you may not be able to borrow as much. That could hurt first-time buyers in markets such as Toronto and Vancouver where home prices are in the stratosphere.[More: 10 ways to avoid buying the wrong house]
The refinancing restriction means, the only way you can refinance is if you do so with BMO," McAllister said. "They know you’re locked in to them so you don’t have any bargaining power if they don’t offer you a good rate or term.”
BMO agrees that this mortgage is best-suited for someone who plans to be in their home for awhile.
“Customers were telling us they wanted something simple and easy to understand that would allow them to be mortgage-free faster,” said Katie Archdekin, head of mortgage products at the Bank of Montreal.
Archdekin said the shorter amortization rate is designed to do just that.
While many home owners have good intentions when it comes to pre-payments, very few actually take advantage of these options, she added.
“This product carries fewer features than our other mortgage products but it’s very easy to understand,” Archdekin said. “This product really supports customers to pay off their mortgage faster by instilling that discipline directly into the regular payments.” [More: 5 reasons to choose a variable rate mortgage]
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