As you may have noticed, BMO currently has an aggressive marketing campaign promoting their 2.99% ‘low rate mortgage’.  This mortgage product was launched on March 2nd, 2010, and BMO seems to be putting more advertising dollars into this product, than ever before.  They are advertising it as “Mortgage of the year” since CanadianMortgageTrends.com name the ‘low rate mortgage’ mortgage of the year in 2011 because “it has made the greatest difference to consumers, whether they know it or not”, however “Objectively speaking the Low-Rate mortgage is not the best product in the market” (source: CanadianMortgageTrends.com).

They have created a very clever combination of sales promotion tactics, and advertising messaging that has led to a flurry of inquiries, discussions, and media coverage of the lowest publicly advertised rate in Canadian history.  For this, I applaud BMO’s marketing team as they have created a buzz around mortgages, something very challenging to accomplish.  Mortgage brokers and bankers have been receiving a record number of inquiries about this ‘too good to be true’ mortgage product.  So, beneath the marketing, what is the ‘product’?

The product is a 5 year fixed ‘low rate mortgage’, where ‘low rate mortgage’ is the actual brand of the mortgage product.  It is not BMO’s regular 5 year fixed rate mortgage product.  According to BMO’s website, their regular 5 year mortgage is 4.09% (as of Jan 17 2012), which is significantly higher, so, what is the difference?

The BMO ‘low rate mortgage’ offers home-owners a trade-off between rate and flexibility. Here are some of the additional restrictions:

  • Mortgage is fully closed and can only be paid off upon sale of your home
  • Pre-payments have been reduced to a 10% lump sum pre-payment, and a 10% increase payment option
  • Maximum amortization is 25 years
  • The option to skip a mortgage payment or take advantage of the BMO cash account is not available
  • The mortgage can only be refinanced or renewed early with BMO

So how could the restrictions affect you?  The most restrictive is clearly the fact that the mortgage can only be paid off with the sale of your home – essentially they have created a retention strategy by eliminating the opportunity for their clients to seek out other options.  Here are some general examples where you may want to pay off your mortgage before the end of your term: you receive an insurance payout and want to pay off your mortgage, you want to refinance but your credit slipped below the minimum score required by your bank so your only option is to move to another lender, or you want to refinance but your bank is not offering you a competitive rate so you want to switch institutions.

The ‘low rate mortgage’ is not for every Canadian.  Even BMO calls it a “no-frills mortgage”, which implies a ‘discount mortgage’, on the mortgage product comparison table on their website.  The fact is, when you’re comparing the ‘low rate mortgage’ to regular fixed rate products, you are comparing apples to oranges, not apples to apples.  What lesson can be learned here?  Don’t be blinded by the marketing – learn the facts, and consult your mortgage broker or banker who can help you determine if this product is the right fit for you.

Written by Doug Adlam
Professor of Marketing, University of Guelph
Branch manager, Champion Mortgage Inc.