Cash back mortgages are unique product available in the Canadian market. This allows you to receive a cash amount back from the lender for use such as moving expenses, furniture or really just about anything you would like to purchase.
Cash back mortgage works like this, first and foremost the cash back mortgage qualifying rate will be a higher rate to allow for the cash portion of the mortgage. Secondly the amount that you can have for cash back is no more than 5% although most lenders will cut it off at 3% of the balance. This means that you will quite likely be financing almost the entire 100% of your mortgage and be doing it at a higher rate than you would normally get for a fixed rate mortgage. So you have to weigh out if there is an advantage to taking the higher rate.
Cash back mortgages are always 5 year fixed terms and there is a penalty for breaking the mortgage earlier than the five years and you must also pay back a portion of the cash back to the lender. The amount that needs to be paid back reduces every year until the final year when you will have paid the entire 5% back and owe the lender nothing.
Cash back does have benefits to you the consumer but you must weigh the options of if it is better to borrow the extra money you need elsewhere or go ahead with the cash back portion.
Here’s a simple example based on 100000 dollar mortgage and a cash back of 5% or 5000 dollars. The cash back mortgage rate would be 4.69% and the regular 5 year fixed rate would be 2.49%, the first’s payment would be 557.00/month the second would be 441.00/month. That’s a 116 dollar per month payment, the biggest difference is that there is a 10,439 dollar interest difference because of the 25 year amortization.
If you borrowed 5000 dollars at 6% simple interest for 5 years your payments would be 96.66 dollars per month and because of simple interest you would only pay 799.00 dollars in interest. Almost a 9500 dollar savings in interest alone.
At Brokers for Life we strive to meet our commitment to you, Real Life Mortgage Solutions. Sometimes the cash back will be right for you sometimes we can help you find a less expensive route to meet the needs of a growing family and moving into a new home in Calgary.
Fill the form below to contact a local mortgage associate in Calgary today, to discuss your cash back mortgage needs.