The Truth About 2.99% Mortgage Rate - Too Good To Be True?

The Bank of Montreal made mortgage rate history a few weeks ago by slashing their 5 year fixed rate by a half a point to 2.99%.  This is the equivalent to a hollywood scandal in the mortgage world.  Consumers and investors went crazy, and the banking world went even crazier.  The other major banks followed suit, some dropping the rate a touch more, some dropping the term, and some levelling the playing field.  

What's the fine print to this crazy offer?  It's the restrictions and limitations.  BMO says that it's a simple product they are offering, and it's for people who want to be mortgage free faster.  Here are what the restrictions are, and more importantly, what they mean to you.

For starters, the maximum amortization is 25 years.  The average amortization period is 30 years, and certain financial institutions can still offer 35 year amortization periods.  If you have to pay back 100$ over 25 days, you will be paying 4$/day.  If you have 35 days to pay it back, you are only paying 2.86$/day.  Now multiply all of this by 4000.  You pay it back sooner, but you have to be sure your payments are comfortable.  This also limits your qualification. The banks base their decision on your salary, and what you can handle on a monthly basis.  A $400,000 home may cost you $1600/month on a  35 year amortization, but it will cost $2200/month on a 25 year amortization.  If your income only qualifies your for the $1600/month, you won't qualify for the $400,000 home with this product.

Prepayment privileges are a lot less flexible than a standard mortgage.  It allows for roughly half of what standard mortgage products offer.  This is not so much of a huge issue, as most people say they are going to pre-pay a mortgage and don't end up doing so.  With a rate of 2.99%, your mortgage should be the last thing you put extra cash into - pay off your car, line of credit, or credit cards before your mortgage - chances are, their rates are much higher,

Skipping payments or doubling up can come in handy if need be, but again is not a deal breaker.  You'd hopefully never have to skip a payment, and doubling up will just be a chip off of the iceberg.

You cannot refinance or switch your mortgage...and you have to give them your first born child, and sign in blood.  I'm by no means a commitment phobe, but, this is a little too sign-away-your-soul for me.  All jokes aside, you have to really look at the reality of the situation.  Did you expect to be where you are now, 5 years ago?  Are you single, married, kids?  All of that can change in a flash.  Let me paint you a more practical picture; you have a condo.  If the worst case scenario occurs and the value of your condo plummets, you CANNOT sell.  That gives me a nervous tick.

This product is good for people who have been living in their home for over 10 years, who know that they want to keep living in their home for the next 10 years.  It's an old fashioned product, for people who want to have their mortgage paid off.