As a general rule, cashback mortgage offers have never really worked to the benefit of the borrower. The Banks loves it when a borrower takes one of these deals because it costs the borrower more, earning a higher profit for the Bank.
A cashback mortgage is easy to understand…. The Bank will usually give you Posted Bank Rates with some cash back on closing… The cash back is depends on the term of the mortgage but it’s usually been between 2% and 5.5% of the mortgage balance.
If you have a $250,000 mortgage, the thought of getting $5,000 to $13,750 back in cash on closing sounds pretty good… But let’s take a closer look…
If you do the math, this usually works out to around a 0.60% to 1.10% discount off Posted Rates. Today’s posted 5 year fixed is 5.69%… that would give you an effective fixed rate of around 4.59% at best… Compare this with today’s wholesale discounted fixed rates of 4.19% and the REAL cost of getting that 5.5% cashback means you will pay $4,767 more over the 5 year term.
The New cashback mortgages
Recently, we came across an interesting offer from one of the major Lenders…. Thought we’d share the details…
-5 year fixed rate of 4.29% with a 2% cashback for mortgages under $400k gives an effective rate of 3.89%…and 3% cashback for mortgages over $400k gives an effective rate of 3.69%.
-5 year variable rate of Prime less 0.50% with a 2% cashback for mortgages under $400k gives and effective rate of Prime less 0.90%.. and a 3% cashback for mortgages over $400k gives and effective rate of Prime less 1.10%
Note: if you were to apply the cashback at the time of closing, the effective rates would be even lower.
There is a catch…These cashback offers are only available for mortgage refinances or transfers from other financial institutions… they are not available for purchases (we don’t understand why but that’s the deal)… AND you CANNOT pay these out early with giving back the entire cashback to the Lender…It is also a little harder to qualify for these products and the approval process is a much more involved and time consuming… You will definitely want your broker to be involved in helping processing the approval… (don’t be surprised if your broker has to charge you a small fee for their time…it will still be well worth it.)
I must say, even with these limitations, it may still be worth considering. It’s good to see some more competition in this segment of the mortgage market.