Today, everyone in the mortgage market are abuzz about the new Bank of Montreal offer for a 5 yr fixed rate at 2.99%. Like with all hype, typically we find that the offering is not always cracked up to what you think.
- First of all the offering has limitations to it which other offers do not have, such as a 10% prepayment option vs. 15-30% prepayment options with other lenders.
- The maximum amortization is 25 years vs. 30 or 35 years with other offers.
- The mortgage is closed, you cannot fully payout without selling to a 3rd party. This also means you cannot amend title such as add or remove an applicant from title.
The prepayment penalty charged upon a sale is a high IRD ( interest rate differential). On a $300,000 5 yr at 2.99% and assuming rates stay the same and one paid the mortgage out 3 years from now, the penalty would be about $11,700 whereas a non bank lender offering 3.04% rate would be about $2500. That is $9,200 extra interest you exposed yourself to for the rate sale. If I presented 2 offers and said one could potentially cost you $9,200 more would you take it?
So be careful, don’t fall for the gimmicky rate sales you see out there. Sometimes the rate sale is good, however, in my opinion flexibility is king! You have no idea about what life is going to throw you, you could get transferred for work and need to sell , you could get divorced or split up from your significant other. Don’t take away flexibility that could be extremely valuable for a mere 5 basis points off the rate. It simply is not good planning.