Cash Back Mortgages
Cash-Back mortgages have for the most part gone by the wayside since the financial crisis of 2008, but before we write them off lets discuss if they were ever worth it.
Is A Cash-Back Mortgage Worth It?
Let’s discuss how it works…
With a Cash-Back mortgage, the client receives a rebate on their mortgage at the time of closing of the mortgage. This rebate varies anywhere from 1% to 5% of the mortgage amount depending on the Bank and term chosen. The most common of the Cash-Back mortgages is the 5% Cash- Back featured by a few of the Canadian Chartered Banks.
The money from a Cash-Back mortgage is especially handy for the fist time buyer who needs extra funds to purchase home improvement items such as blinds, carpet, appliances, or even furniture. Thus, first time buyers are the number one consumer of Cash-Back mortgages in Canada. A few banks allow the Cash-Back to be used towards the down payment.
It is important to remember that this rebate is never directly paid back to the Bank. Instead the Bank increases the interest rate on the entire mortgage to recoup their costs.
Why would I want a Cash-Back mortgage?
- You have saved up enough money to purchase your home, but may be a little short after the mortgage closes. The Cash-Back acts as a buffer to get you through the first couple months as a new home owner.
- You utilized the RRSP Home Buyers program and withdrew your down payment out of your RRSPs. Now you need money for legal fees and moving expenses.
- You received a gift from your family to put towards your down payment but want some money in order to feel more comfortable taking on this new liability.
Why wouldn't I want a Cash-Back mortgage?
Simply put, a Cash-Back mortgage usually costs you more in the end and Banks never offer their best rates on a Cash-Back mortgage.??The following chart will help explain the costs and benefits to a Cash-Back mortgage given the purchase of $100,000 home.
*Rates available at the time this article was written (AOC).
As you can see from the example above, a 3% Cash-Back on your $100,000 home purchase would give you a rebate of $2,943 and would cost you $4,252 over the life of the mortgage. Not exactly cheap, but well worth it if you won’t be able to afford basic necessities after you put a down payment on your new home.
A common misconception is that Cash-Back mortgages are only for home purchases. However, they can also be used for refinances on revenue property purchases.
Do note that very few lenders provide Cash-Back mortgages on variable interest rate mortgages.??Other things to watch for on most Cash-Back offers:
1) The Cash-Back will be clawed back (on a prorated basis) if you decide to pay off your mortgage, transfer it, or make a significant change to it within the first term of the mortgage (i.e., first 5 years).
2) The remaining prorated Cash-Back amount could be charged back to the seller of a home if he offers his mortgage up for assumption.