Cash incentives! Free living! Sounds like late night infomercials. But no, your neighbourhood banker is trying to catch your attention and your business. Watch out for those great mortgage deals!

For years, the banking industry has been trying to figure out how to stop something they started as a "temporary" solution for increased market share...rate discounting. Rate discounting is the difference between the posted rate at the door of the financial institution, and the rate you can get if your credit is good and you don't mind haggling. In most cases, rates can be discounted by at least half of one percent (1/2%), and often by three quarters of one percent (3/4%).

Of late, some institutions have been offering Consumers an amount of cash, instead of the discounting. Let's look at an example on a normal $100,000 mortgage:

Mrtg $	Rate	Mthly Pmt	Bal in 5 Years	Cash Incentive
$100,000	7%	$700.42	$91,044.59	Approx. $1700
$100,000	6.25%	$700.42	$86,948.93	Savings $4095

On the surface, here we have a lending institution offering you a $1700 gift, if you agree to take a long term (ie. five year) at the posted rate. If you had chosen the rate discount instead, the difference in amount owing in five years would have been in your favour by $4095.66. Who is doing who a favour? You have no doubt noticed that the payments above are identical. If you were prepared to make payments of $700.42 / month without discounting, you should be prepared to make the same payments if you get a cheaper rate.

Some might argue that the cash incentive can be utilized to pay down on the mortgage, increase your down payment, or help defray closing costs (legal fees, land transfer tax etc.) In the eyes of this writer, if you can get the rate discount, take it over cash incentives.

page 2 of 2

Instead of offering a cash incentive, some lenders are offering to allow you to skip your payments by up to three months, and some developers are offering on top of that another three months worth of free living. For most consumers, getting six months worth of life without rent

or mortgage payments seems like a dream come true. Imagine what you can do with that $700 per month you don't have to put into mortgage payments. Eventually, the free ride ends!

What have you done with the money you should have been putting into the mortgage. Chances are, it got spent because it was there to spend. Now reality sets in and for the next five years you are stuck with a rate that could have been 3/4% cheaper. Who really won?

Instead of the free ride, ask your developer to reduce the price of the house or grant you extras within the house. Then tell the mortgage lender, you want a discounted rate, not the posted rate. In the end, your negotiations will turn short term pain into long term gain.

Remember, when your lender is offering cash incentives or free living, there is another choice, rate discounting. The latter is probably the best deal!