Beware of bankers bearing gifts
April 17, 2004
Sandra E. Martin
National Post
These days, shopping for a mortgage is a lot like shopping for cosmetics. Financial institutions are all offering some kind of department-store-style "gift for purchase" when you get into hock with them. Except instead of sample-sized lipsticks, lenders are luring homeowners with bonus Air Miles, free home furnishings and good, old-fashioned cash.
RBC Royal Bank, for instance, is working with new-home developers to entice buyers with gift certificates for The Brick. It's the bank's way of making warm and fuzzy with cash-strapped couples who have horrified visions of sitting on milk crates for months in their new homes. Buying a resale house? Ask for cash back with your mortgage, and the bank will advance you the furniture-shopping money you need.
Over at Bank of Montreal, Air Miles collectors can claim up to 500 reward points. If you're not the loyalty-card type, BMO is happy to give you three free mortgage payments or, if you'd rather, up to $10,500 cash back on the average-sized $150,000 mortgage.
For those who prefer to give unto others, Toronto-based Metro Credit Union will donate 0.5% of your principal amount to charity. So if you borrow $150,000, the credit union immediately cuts a cheque for $750 to the charity of your choice.
And right now, TD Canada Trust's Web site is touting a Home Buyer Incentive - $1,000 in your pocket when you take out a new mortgage with them.
What gives with all the graft? Not so long ago, the only thing homeowners expected from their mortgage was a way to pay for the roof over their heads. In the 1980s, people were grateful to the bankers who bestowed them with double-digit loans, and no one thought to ask for a better rate, let alone Air Miles.
What a difference a couple of decades makes.
"Twenty years ago, the posted rate was the posted rate. Now there's some scope for negotiation," comments Patricia Arsenault, an economist with Clayton Research in Toronto.
Ms. Arsenault believes the shift in attitudes began in 1994, when the housing market slowed down, and lenders had to scramble for the few potential borrowers who were actively looking.
To "get the competitive edge," she continues, financial institutions were forced to start discounting their posted rates. And once borrowers got a taste of negotiating power, there was no going back.
The legacy of those times is that consumers, by and large, have come to take low rates for granted. You can apply online for a home loan through ING Direct and get a mouth-droppingly low 3.15%, no bargaining required.
As a matter of fact, if you're okay with the concept of a mortgage that fluctuates with prime, you can sign up for under 4% pretty much anywhere.
For those who prefer to pin down exactly how much carrying their mortgage will cost, the posted rate for a five-year fixed mortgage is currently just over 6% at major banks, and most customers with good borrowing histories will be able to bargain that down to around 5%.
"These days, if you ask for a point off, you can get it," says Doug Anderson, a real estate agent based on B.C.'s Sunshine Coast, who's been in the home-buying business for 18 years.
Therein lies the rub for lenders. How can you get customers to come knocking on your door if everyone else's mortgage rates are as cheap as yours?
That's where most of these new perks are coming from.
"All the different banks and credit institutions are trying to stand out," observes Don Campbell, a real estate consultant and president of the Calgary-based Real Estate Investment Network. "I've never seen it (the mortgage industry) this aggressive."
Mr. Campbell cautions, however, that mortgage perks are not pennies from heaven. In most cases, the price of the perk is a higher-than-optimal interest rate, and you end up covering the cost of the perk, and more, in your future payments.
Brian Mathey, a Kingston, Ont., mortgage broker and former banker, agrees. "In mortgages, there never really is a deal. There are good mortgages, and there are mortgages that are made to look good."
Mr. Matthey, head of The Mortgage Professionals since 1989, describes the case of a client who came to him for help with refinancing a cash-back mortgage he signed up for almost three years ago. Although the client's original mortgage had seemed like a good deal, when he asked about refinancing to take advantage of current low rates, "all of a sudden his penalty is $11,000."
Turns out that buried in the fine print of the mortgage agreement was the stipulation that, if he walked away before the term was up, he'd have to repay the cash bonus in full.
Not all perks come with such punitive terms. However, Scott Brown, vice-president, residential mortgages and home financing for RBC Royal Bank, admits that cash-back mortgage customers will have to pay for their upfront money with a slightly higher interest rate. The amount of forwarded cash is entered into a computer program, which spits out the terms that will allow the bank to recover it over time.
In the case of Metro Credit Union's new get-a-mortgage-give-to-charity product, the cost of each donation comes out of the institution's marketing budget. Vice-president of marketing and community relations Kimberley Ney is hoping charities that sign up for the program (there's no charge to the charity) will encourage their supporters to sign up for a mortgage with Metro. Instead of claiming the charitable donations on its own income tax return, Ms. Nay says the credit union will consider each one "a referral fee."
For its part, the Bank of Montreal, has said that all or any of its perks can be added to any fixed-term or variable-rate mortgage, without sacrificing the ability to negotiate a better rate.
At BMO, mortgages are considered a kind of loss-leader for the bank. Good, cheap, mortgages make for happy customers who go on to do business with the bank in other ways. "The mortgage business is so critical," says Maria Racanelli, vice-president of personal banking at BMO. "It's our way to develop and nurture relationships with our customers."
Besides, Ms. Racanelli adds, some homeowners prefer to pay a little more for mortgage features that add convenience (cash back to buy furniture) or peace of mind (a fixed rate). Not everyone, she adds, is fixated on getting the cheapest rate: "If that was the case, we'd have everyone clamouring for the six-year, variable, below-prime" mortgage.
If getting the lowest rate possible is your main concern, shop around for a product that's free from bells and whistles, and that fits your financial needs.
Otherwise, there's no real harm in picking a mortgage with perks, as long as you're aware of all the costs - up front and long-term.
"Make sure you keep asking what's behind the curtain," Mr. Campbell advises. "What, really, are you pitching me here?"