What are the penalties for breaking a variable mortgage versus a fixed one?
This article has been updated from a previous version. If you decide to break your mortgage, w...
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Are you ready to buy a home? Congratulations! Purchasing a property is a huge milestone and one of the most important financial decisions you’re likely to make. If you’re looking for the best BMO mortgage rates on the market, LowestRates.ca is the right place to find them. We make comparing BMO mortgage interest rates against the offerings of other lenders quick and easy.
First, it helps to know some key mortgage terms and concepts so you can choose the right product for your needs. Different types of mortgages can have different interest rates, and it’s important to understand the factors that affect the interest rates lenders offer you.
One important decision you’ll need to make about the type of mortgage you want is open vs. closed. Here’s a breakdown on the difference:
There are lots of other mortgage types and terms that are just as important to understand. Don’t worry! We’ll break down everything you need to know about BMO mortgages and demystify the mortgage process.
With this information in hand, you’ll be well-prepared to find the right mortgage product — along with the most competitive mortgage rates on the market — using LowestRates.ca.
All variable Bank of Montreal mortgage rates are set in relation to the prime rate. So what is a prime rate, and where does it come from? Great question! The prime rate is the interest rate a bank charges when it lends to its most creditworthy customers. It’s a baseline percentage that serves as a reference point for setting variable interest rates for all borrowers, for all types of variable loans the bank offers.
Naturally, it follows that the prime mortgage rate is the prime rate for a bank’s mortgage borrowers. BMO prime mortgage rates will be one factor along with several others that will impact the final mortgage interest rates you are offered for your home loan, should you choose a variable-rate mortgage.
Financial institutions each set their own prime rate, but these are heavily influenced by overall economic trends and by actions of the nation’s central bank, the Bank of Canada. The Bank of Canada sets interest rate policy to try and steer the country toward steady, long-term economic growth with reasonable inflation and unemployment figures. These policies, in turn, have a significant impact on banks’ prime mortgage rates. Variable mortgage rates will always move in relation to the prime rate.
When you review a lender’s variable-rate mortgage products, knowing the role of prime rate will help you understand the formula for how your rates will be adjusted over the course of the mortgage term. The next step in securing the best rates for your home loan is to compare BMO mortgage rates for different products, and against other lenders, using LowestRates.ca’s fast, free online quote tool.
BMO posted mortgage rates are the interest rates the bank publicly advertises. All banks and lenders typically provide posted mortgage rates on their websites as a way to entice customers to apply for a home loan with them. These rates provide a rough estimate for prospective borrowers shopping for a mortgage.
Posted mortgage rates usually differ according to different loan types, and assume certain characteristics and preferences of the borrower and the property being purchased. For example, BMO’s posted rates highlight offerings for a 3-year fixed-rate mortgage, a 5-year fixed-rate mortgage, and a 5-year variable-rate mortgage. These posted rates assume an amortization period of 25 years or less and are closed mortgages, meaning the borrower must adhere to certain rules limiting the types and amounts of accelerated payments they can make to pay off their mortgage early.
Posted BMO mortgage rates online also vary for the most popular mortgage term and type, the 5-year fixed-rate mortgage, depending on whether or not the homebuyer has mortgage default insurance. With insurance, the posted rate is lower.
Posted mortgage rates can be a helpful starting point for comparing rates from different lenders, but they don’t tell the whole story. So many factors go into the formulas that mortgage lenders use to set your rates that it’s crucial to get quotes for your specific situation: your credit history and debt ratios, the size of your mortgage, the amount of your down payment and more.
Luckily, comparing rates from multiple lenders is easy and fast when you use LowestRates.ca. Enter a few details about yourself and the home you’re buying, and in three minutes you can compare quotes from 50+ Canadian banks and brokers.
A fixed mortgage allows you to lock in BMO’s current mortgage rates for the length of your mortgage term. Fixed interest rates insulate you from swings in the market that cause fluctuations in interest rates. This means you could miss out on declining rates during your mortgage term. However, it also means you’re protected if interest rates increase. Fixed mortgages are right for people who prefer predictability, and for those who believe interest rates are likely to increase over the mortgage term.
BMO fixed mortgage rates, like all lenders’ fixed rates, are historically higher than variable mortgage rates. However, the majority of Canadian homebuyers choose fixed-rate mortgages. Most people prefer having predictable interest payments. This means that the amount of the loan’s principal that you’re paying down with each mortgage payment remains steady as well.
The most common mortgage term in Canada is five years. BMO offers fixed-rate mortgage terms ranging from one to 10 years in length. BMO highlights their 5-Year Smart Fixed Mortgage and 10-Year Smart Fixed Mortgage products, for homebuyers seeking an amortization period of 25 years or less. These options offer the stability of a fixed interest rate and the generally favorable interest rates of a closed mortgage product, but also allow borrowers some flexibility to make limited accelerated payments if they want to pay off their home loan ahead of schedule.
If the surprise of changing interest rates doesn’t bother you, and you want some of the lowest mortgage rates on the market at any given time, a variable-rate mortgage might be right for you.
BMO variable mortgage rates, like those for all lenders, tend to be lower than fixed mortgage rates.
In exchange, though, the borrower with a variable-rate mortgage assumes more risk than a homebuyer with a fixed-rate mortgage. Market fluctuations for better or worse will affect the amount of interest you pay over your mortgage term when you opt for a variable-rate mortgage product. That’s because your interest rate will be tied to the bank’s prime rate, which will vary according to current policy from the Bank of Canada (and ultimately, national and global economic trends). This can allow you to pay off your home loan faster when the prime rate declines, but you also risk a slower process of repayment when the prime rate increases.
Either way, your payment amount will remain the same. With a variable-rate BMO mortgage, you’ll just see more or less of your payment allocated to the loan’s principal and interest depending on where BMO mortgage rates are today.
BMO’s variable-rate mortgage offerings include a 3-year open mortgage and a 5-year closed mortgage option. The 5-year closed variable-rate mortgage offers the lowest variable rates, while the 3-year open mortgage offers greater flexibility to pay off your mortgage sooner without prepayment penalties.
Whether you opt for a variable or fixed-rate mortgage option, LowestRates.ca can help you find the best available BMO mortgage rates in Canada by comparing quotes for different mortgage products using our free online quote tool.
While BMO’s mortgage loan rates will be a major factor as you consider whether to work with the bank or another lender, you’ll also want to consider special features BMO offers with their mortgage products that set them apart from their competitors.
BMO’s Smart Fixed Mortgages are closed mortgage products that still allow borrowers some flexibility to make limited additional payments to pay off their mortgage loans faster if they choose. This is a nice benefit not available with every closed mortgage. You can choose to increase your payments by up to 10% once each year, and also have the option of making a lump sum annual payment of up to 10% of the original mortgage amount, without a prepayment penalty.
In addition, pre-approval for any BMO fixed-rate mortgage comes with a generous timeframe for house-hunting, when your mortgage interest rates are locked in. Lenders typically guarantee your rates won’t increase for a set period following pre-approval for a fixed-rate mortgage, but this period is often limited to 90 or 120 days. BMO guarantees your fixed mortgage rates for 130 days.
To get approved for a BMO mortgage, you will have to gather and submit a variety of documents that provide a picture of your financial situation. You will need to provide proof of your identity, income and employment, and records of any debts you owe, such as student loans, car loans or credit cards. The bank will also ask for information about your assets — any valuable property you currently own, like a vehicle or another home. You will also need to provide financial records showing you’re able to make a down payment and cover closing costs as part of the home purchase. BMO will also review your credit history.
Pre-approval for a mortgage eases the homebuying process. It gives you a sense of the maximum your bank is willing to lend you for your home purchase and what your monthly payments are likely to look like. Pre-approval, also called mortgage preauthorization, also assures sellers that you’re qualified to close the deal when you put in an offer. This can make you a more attractive bidder than one who doesn’t already have pre-approval for a mortgage loan.
You can get pre-approved for a mortgage through a lender (such as a bank or credit union) or a mortgage broker. Brokers don’t lend you money directly, but can help you shop among different lenders and can facilitate a mortgage loan. Whoever you work with, to get pre-approved, you’ll need to provide information about your identity, employment and income, and you’ll need to confirm that you’ve been employed for at least two years. You can usually get pre-approval online.
When a lender pre-approves you for a mortgage, they typically also guarantee fixed interest rates for a set period of time while you shop for your new home. BMO offers a 130-day mortgage rate guarantee following pre-approval. Other lenders usually offer up to 120 days, or may offer even less time, like 60 or 90 days. BMO’s mortgage rate freeze after pre-approval gives you more breathing room to shop for the right home without worrying about a potential interest rate increase.
It’s important to note that while pre-approval is a helpful step in the mortgage process and can provide useful perspective, it doesn’t guarantee you’ll be approved for a mortgage from the lender.
The size of mortgage you can afford depends on a number of factors, including your income level and down payment amount, and your levels of debt from other sources, like student loans, credit card and car payments.
Lenders take into account two key figures regarding your debt when considering the size of mortgage loan they will offer you. These include:
Many lenders, including BMO, offer online mortgage affordability calculators that let you plug in your financial figures and show an approximate maximum mortgage amount that they would approve. Keep in mind there may be a difference between what a mortgage lender considers affordable and what you’re comfortable with. You may not want to borrow the maximum mortgage amount your lender will allow.
Mortgages are customized products and the terms and conditions depend in part on your negotiations with your lender. BMO mortgage rates are obviously one important aspect of your mortgage. The length of your mortgage term, the amount of your mortgage payments and penalties for breaking the contract or making prepayments are other important elements to know, and potentially negotiate, before you sign with a lender.
Prepayment penalties kick in when you pay ahead of the schedule specified in your closed mortgage contract (open mortgages allow for early payment, but tend to have higher interest rates). Prepayment fees are often high enough that they cancel out the financial benefit of paying off the loan earlier and saving on interest. Lenders sometimes offer limited penalty-free accelerated payment options with their closed mortgages, but their policies differ widely. It’s important to understand exactly what’s allowed under your contract if you think you might want to make extra payments on your mortgage.
Similar penalties usually apply if you switch lenders or sell the home, breaking your mortgage contract. Again, it’s important to understand the details of your mortgage contract so you don’t end up paying unexpected fees.
The mortgage term is the duration of your mortgage contract. In Canada, mortgage terms can range from six months to 10 years in length. The mortgage contract details the interest rate you’ll pay during this period (if your loan has a fixed rate) or explains how the interest rate is calculated and when it can change (if your loan has a variable rate). The contract also explains all the other rules that may apply to your mortgage during this time, such as penalties for prepayment or breaking your contract.
Typically, Canadian homebuyers will have several mortgage terms during the amortization period, or full life of your home loan. When each mortgage term ends, unless you’ve paid off the loan completely, you will have the option of renewing with your current lender or shopping for another lender to work with. Your interest rates can change at this time, so it’s important to compare rates among lenders and mortgage products to find the best deal on the market.
The amortization period is a schedule showing how long it will take you to pay off your mortgage in full. You’ll be able to review details of the amortization period during negotiation of your mortgage contract.
The amortization schedule is an estimate based on current interest rates and mortgage terms. Since you’ll likely have multiple mortgage contracts during the life of your loan, the terms can change, which can influence how long it takes you to repay your mortgage.
BMO offers amortization periods of up to 30 years. However, in order to qualify for mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC), the maximum amortization period allowed is 25 years. CMHC insurance is required for all high-ratio mortgages, when a borrower makes a down payment below 20% of the home’s purchase price.
If you want to pay off your BMO mortgage sooner than the timeline outlined in your mortgage contract, it’s important to negotiate favorable terms with your lender before you sign, and to understand the rules about how you can and can’t make accelerated payments.
These details are crucial, because closed mortgages come with prepayment penalties — fees for paying off your loan early or making extra payments. Often, these fees are high enough to cancel out any savings on interest you might otherwise see from paying off your mortgage faster.
Open mortgages allow the most flexible prepayment possibilities, since they don’t charge these kinds of penalties. But they usually come with higher interest rates. The good news is that lenders differ in their prepayment rules for closed mortgages, often offering some limited opportunity for making additional payments without getting hit with a penalty. And you may be able to negotiate other changes with your lender as part of your contract.
If you know you’d like to pay your mortgage faster when you buy your home, you can always choose a shorter amortization period. This will increase your monthly payments, but will allow you to pay off your mortgage faster and save on interest.
Unless you have an open mortgage, BMO, like all lenders, will charge penalty fees for breaking your mortgage contract by paying off your loan early, selling your home, refinancing, or renewing your mortgage with another lender before your mortgage term has ended.
All of these situations fall under the category of prepayment penalties, and the details of these fees and the actions that trigger them will vary according to your mortgage contract. All closed mortgages have some prepayment penalties. This allows the lender to have more predictability around your repayment schedule and interest payments. In exchange, the lender offers the borrower lower interest rates than they would get with an open mortgage.
BMO’s exact prepayment terms vary across mortgage products, and you may wish to negotiate further as part of the initial homebuying or mortgage renewal process. If you think it’s likely you’ll want to break your BMO mortgage by refinancing, selling your home or paying it off before the end of your mortgage term, be sure you understand the rules and penalties that will apply in this situation.
LowestRates.ca works with 50+ banks and brokers across the country to bring you the best rates. We work with our partners to obtain their best deals and offers, and then we let them compete for your business. All you have to do is answer a few questions, and in minutes you’ll be provided with today’s mortgage rates. There’s no obligation, but you can choose to speak with our broker partner to secure your best rate and see if you're eligible for more savings.
Yes, it’s safe — you no longer need to visit a bank branch or mortgage broker’s office in person to apply for a mortgage. It’s becoming increasingly common for Canadians to apply for mortgages online. LowestRates.ca only works with reputable, trustworthy financial institutions. Your credit score won’t be affected and your information is secure. We don’t share your information with anyone unless you want to connect with a mortgage broker. We take care of the heavy lifting by comparing the market for you and can connect you with the best mortgage lenders across the country.
We have a strong selection of lenders on LowestRates.ca, including the big banks and many independent providers, and we’re adding more lenders all the time. This ensures we’re always delivering you a competitive rate. Even if you’re not ready to commit to anything, you can use our site as a starting point for research (it’s totally free, and you’re under no obligation).
The better informed you are, the more likely you'll negotiate a better deal for yourself. And, really, that’s what we care about the most.
This article has been updated from a previous version. If you decide to break your mortgage, w...
This article has been updated from a previous version. As the world slowly returns to normal —...