Last month, the Bank of Montreal, in an attempt to gain market share during the slower winter housing months, surprised the mortgage industry by introducing a posted 2.99% 5-year fixed rate mortgage to the marketplace. The move prompted a bit of a mortgage war as other lenders played catch-up to match what was done by BMO. The result of all of this maneuvering is that consumers now have some of the lowest rate options in history.
But why would the Bank of Montreal want to start a mortgage price war?
The reason is that many of the big banks see mortgage lending as an effective loss-leader in order to capture more overall banking market share. After all, a mortgage is often a 20+ year commitment. During that time, your lender will have a good reason to contact you about an assortment of lucrative financial products: banking services, credit cards, commercial loans, lines-of-credit, private banking, investment products, etc. So it makes financial sense for the banks to sacrifice profits in their mortgage division in order to attract more customers to their higher margin products.
This explains BMO's strategy for offering the 2.99% mortgage. You see, this product is offered as a no frills mortgage, which effectively means that the bank is locking its customers into a contract, with punitive penalties for breaking it (and without a bona fide sale it cannot be paid in full). That's a good option for the bank, which is counting on being able to up-sell other products during that time, and it's a good option for borrowers who know how their lives are going to unfold over the foreseeable future. But beware: a lot of things can change in one's life over 5 years.
So what should you do?
While it's always nice to get the best rate possible, remember that there's more to a mortgage than just the rate. This price war has resulted in the lowering of MANY different types of mortgages so now should be the time to sit down with a professional mortgage specialist or broker and see what is best for your set of circumstances.
Please contact me if you have any questions, or would like to be referred to a mortgage broker.