Not all mortgage incentives are created equal.

?It seems so simple.? You?re shopping for a mortgage and walk into three different financial institutions. The lender that offers you the lowest interest rate wins your business.

Unfortunately, it?s not quite that straight forward, given that most lenders today serve up a crazy number of combos involving non-cash incentives ? such as Aeroplan reward miles, Air Miles (as the crow flies), grocery credits, department store points ? cash back deals and discounted interest rates if you apply online.

Bank of Montreal, for example offers at least 25 basis points off its posted interest rate if you apply online, but if you agree to the regular rate it offers a 3% cash back deal instead, plus 500 Air Miles (not to be confused with Aeroplan reward points).

President?s Choice Financial won?t give you interest rate discount, beyond it?s lower than average rates, but it will toss in a few thousand dollars worth of groceries.? CIBC, meanwhile, promises a 2% cash back with a choice of Club Z Points or Aeroplan reward miles ? or , a straight 3% cash back with no extras.

You?ll develop an eye twitch trying to determine which deal saves you the most money (see table).? It also makes you wonder if it?s at all worth it,? considering that some mortgage brokers insist that lenders? posted rates are meant to be negotiated ? often up to one percentage point off.? And if you go for one of the combo deals, you?ll likely give up the chance to negotiate a lower rate ? and the higher rate will usually cost you more money in the long run.

Mortgage broker Paula Roberts, with Mississauga, Ont.-based Norlite Financial Services, calls the incentives ?teaser products.? ?The lenders want you to make the phone call and then you find out the nitty gritty of the deal ?? So, on a five-year deal you may get a 3% cash back, say $2,500, but you end up spending $4,000 more because you didn?t get the rate discount.?

Recently, Ms. Roberts haggles with Bank of Nova Scotia on behalf of Alicia McLean,? a 27-year-old editorial production manager, and walked away with a full percentage point of the bank?s posted rate on a five-year closed (conventional, joint) mortgage amortized over 20 years.? But Toronto Dominion Bank wouldn?t be outdone, and later matched the deal.? A full point off, or 100 basis points, beats all other deals the Financial Post surveyed.

Ms. McLean knew about the various incentives but didn?t bite. ?At that point I wasn?t interest in any gimmicks.? I was just concerned with getting a good interest rate.? This is a mortgage we?re talking about, not some piddly little loan.? A full percentage point makes a big difference over the long term.?

Of course, many bankers argue that it?s better to go for the incentives than to count on a discount you may not be able to get.? ?That?s cocktail talk,? says Paul Mims, CIBC Mortgages Inc.?s vice-president of marketing.? ?Most people can?t get [ a full-point discount]? It?s all well and good to say, gee, it?s more beneficial longer term to get a discount.? But the thing is, if you need [the cash back ] for closing, it?s irrelevant.?

It?s true.? That discount isn?t guaranteed, especially for consumer with less than stellar credit rating.? But 75 basis points off is common.? In that case the cash-back programs aren?t a bad deal ? just barely beating out the three-quarter-point discount.? And for a young buyer with good job prospects and no furniture, it may be more sensible to take the immediate cash to buy table and chairs instead of waiting for the long-term benefits.

Jane Weatherbie, B of M?s vice-president of mortgages, sings the same banker?s tune ? the one about individual needs and priorities.? ?The overall choices are the special promotion or the discount, with the exception of the air miles which are simply a thank you.,? she says.? ?It?s a toss-up of which would be better for the customer, cash in your pocket now versus the savings over the five years.?

Still, most would agree the main priority is getting the best deal possible ? which does not include CIBC?s Club Z points.? As the table shows, you will bet an impressive number of points, 3,992,850 to be exact, but considering 60,000 Z points are worth only $10, it doesn?t make sense to forego a more valuable interest rate discount.
I?m always afraid to say it makes sense or it doesn?t make sense,? CIBC?s Mr. Mims says. ?It depends on what the individual customer wants.?

Fine.? But next time you?re in the market for a mortgage, if you need to save cash, make sure what you want makes sense.

HOW INCENTIVE PROGRAMS STACK UP
These figures are based on a $200,000 mortgage amortized over 25 years, with an initial five-year, closed term at 8% annual interest rate.? Present values used for interest savings and other rate discounts.? Air and retail points converted to equivalent dollar value based on typical reward claimed.

If you negotiate $ value
One percentage point discount on major lenders’ posted rate 7,760
Three-quarter-point discount on major lenders’ posted rate 5,821
If you accept their offer
Institution Discount/incentive $ value
Bank of Montreal 3% cash back + 500 AirMiles 6,000
Canada Trust 3% cash back 6,000
CIBC 3% cash back 6,000
President’s Choice 0.5% off major banks’ posted rate*
Plus 2 million PC grocery points
5,881
CIBC 2% cash back + 85,857 Aeroplan miles 5,578
Bank of Nova Scotia 2% cash back 5,000
CIBC 2% cash back + 4 million Club Z points 4,665
Citizens Bank 0.5% off major bank’s posted rate 3,881
Toronto-Dominion 0.5% online discount 3,881
Royal Bank 1% cash back 2,000
Bank of Montreal Online discount (0.25 below posted) 1,941

Financial Post
October 23, 1999
Leslie Lucas