Cash Back Mortgages, What You Need to Know:
Purchasing a home is a major decision and takes a lot of planning. It requires a huge chunk of your savings to finance the purchase. After saving up for the down payment, you may realize that there isn’t enough money left over for closing costs, furniture, or possibly landscaping.
This is where a cashback mortgage comes in. Many lenders offer cashback and the percentage varies amongst lenders. The cashback is given at closing at the lawyers and cannot be used for the down payment. This is a tax-free payment and can be used for anything you like.
How Does it Work?
Let’s say you purchase a home for $350,000 and you have a 20% down payment. You choose a 5-year mortgage that offers one percent cashback. So, for a $280,000 mortgage time, 1% equals a $2800.00 cashback.
Nothing is free when it comes to banks. A cashback mortgage is always a little higher interest rate as compared to a non-cash-back mortgage. As an example: If you selected a 5- year rate at 3.75% you would end up paying the lender an extra $4378 over the 5-year term. That is after you deduct the cash rebate you received when you closed the mortgage. Not everyone is willing to pay $4378 for an upfront mortgage rebate of $2800.00
Eligibility for a Cash Back Mortgage
Not everyone qualifies for a cashback mortgage. You must have a high credit score, a low debt-to-income ratio, full-time employment, and is only available for owner-occupied properties. No rentals are allowed under the cashback program.
If you break the mortgage term early by selling or refinancing, you will be on the hook for either a percentage of the cashback rebate (pro-rated based on the number of months left in the term or you will have to pay the entire amount back. This depends on which lender you have chosen to take the cashback mortgage from.
I’ve been hearing more and more about the BMO and CIBC 5% cashback mortgage offer. Cash in your hand after purchasing may sound appealing, but understand the cost of that money.
Here is a scenario to think about:
A $400,000 purchase with a 5% down payment would have an initial mortgage of $395,200 after mortgage default insurance premiums are included (aka CMHC fees).
EXAMPLE 1 – Standard mortgage without cashback
2.79% 5-year fixed rate
Monthly payment: $1828
Interest paid over 5 years: $50,900
Mortgage balance at renewal: $336,420
EXAMPLE 2 – 5% Cashback mortgage ($20,000 back to you)
5% 5-year fixed rate
Monthly payment: $2298
Interest paid over 5 years: $92,490
Mortgage balance at renewal: 349,780
INTERST PAID: $41,590 MORE
MORTGAGE BALANCE AT RENEWAL: $13,360 MORE
TOTAL FINANCIAL IMPACT: $54,950!!
Your $20,000 cost you $54,950
And if you break your term early you pay the penalty plus the ENTIRE initial cashback amount. Ouch! You really need to decide whether this is truly a good option especially since it is statistically proven that most Canadians move on average, every three years.
If you don’t mind the higher interest rate, a cashback mortgage can be a good option if you NEED the extra money. Speak to one of our licensed mortgage professionals to see whether a cashback mortgage is right for you.
The Independent Mortgage Professionals at Mortgage Tailors have access to hundreds of different mortgage products. To see what kind of mortgage you qualify for, contact Mortgage Tailors today!