Stay away from mortgage cashback offers!
It’s the Spring market… ok, the weather isn’t saying this but the real estate market is. You’re gonna start seeing and hearing more ads on TV, radio, news sites, even finance blogs. So here’s a some quick words of advice. STAY AWAY FROM TODAY’S CASH BACK OFFERS!
There are a few different types of mortgage cash back offers. The most common offer is one where the Bank or Lender gives you 5% of the mortgage balance on closing. That’s right they give you 5% back in cash. For example: a $400,000 mortgage would get you back $20,000 in cash.
This type of cash back does serve a purpose. If you are a young home buyer with little or no down payment, but you have a good job and don’t want to wait to save up that down payment, then this isn’t a bad way to get in the market. Just ask those that did this 5 years ago. With real estate values up by around 35% to 50% in that time, this isn’t a bad deal.
The negative is that even with that 5% cash back, you end up paying about 1.00% more on the rate. That’s 1.00% more per year, for 5 years. On that same $400,000 mortgage, this ends up costing you around $15,000. And if you need to pay this mortgage out early, the Bank has a clawback clause that makes you pay back the cash back on a prorated basis, but it’s still a hefty cost.
A few years ago, there was a legitimate cash back offer that gave you cash and a discounted rate. That didn’t last for long and I’m not sure how that Lender could even afford it. So say it was probably a mistake.. That was the only time I say a good cash back offer.
But then we have another offer that seems to have made its way in the homes of seasoned, more experienced borrowers. And this is an alarming trend. I’ve seen this same product marketed to non-first time home buyers. This offer is based on shorter terms of 3 years or the Variable rate mortgage. Here’s why you need to stay away from these products.
First, the claw back clause remains in there. Second, the cash back is equal to less of a benefit then just negotiating your best rate. The best cash back offer I have seen will give you 0.67% off on a 3 yr fixed rate term. The rate is 3.75% less 0.67% = 3.08%. Why take this when you can get 2.89% or better elsewhere? The Variable rate offer is the same. They will give you 3% on a 5 year Variable rate. That works out to Prime less 0.40% for a rate of 2.60%. But you can get Prime less 0.50% with no gimmick offers and you are subject to the claw back if you have to pay the mortgage early.
You know what? I’ve written about the pitfalls of cash back mortgages for years. And I’ll continue to do so. Let your friends know about this. I have seen even the most educated people get fooled into these products… don’t assume everyone will avoid them. Maybe a few more people will read this and think twice about it. At least,that’s my hope.
Your best interest is my only interest. Like this article? Share with a friend. I reply to all questions and I welcome your comments.
Steve Garganis 416 224 0114 steve@mortgagenow.ca
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As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.
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Good article. Very important info. Lillian
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“Second, the cash back is equal to less of a benefit then just negotiating your best rate. The best cash back offer I have seen will give you 0.67% off on a 3 yr fixed rate term. The rate is 3.75% less 0.67% = 3.08%.”
Check out CIBC. If you have a $400K mortgage they’ll give you a 3yr fixed with 3% cash back. No mortgage anywhere can beat this effective rate.
Hi Happy2Save,
Appreciate your comment but that’s not correct. CIBC will give you 3% cashback but only on 5 yr terms… they only give 2% back on 3 yr terms.. type in cibc cash back mortgage in google and see the CIBC offer.. Making the rate less attractive, and not as good as what you can get elsewhere.. then you have to deal with the potential clawback if you ever pay this out early or leave CIBC early… and you also have to deal with the infamous CIBC inflated penalty calculation.. I had a client pay a $33,000 penalty on a $500,000 mortgage last year… I would never want anyone to face that situation.. why would anyone choose CIBC or any of the BIG SIX BANKS for a fixed rate mortgage??
I believe it’s possible to get a 5% cashback with an inflated rate. However if you put the cash back offer right back on the principal, even with the inflated interest rate you’d still have a lower principal at the end of 5 years.
Example I did, 13,000 cash back, but due to inflated interest you pay 11,000 more in interest. Still a gain of $2,000 on your end.
Hi Jordan,
I think you haven’t calculated this correctly. With any cashback product, the interest rate cost is much greater than the cashback. In your example, you have a $260,000 mortgage, assuming you received a 5% cashback. That is the best offer available… If you began the mortgage without the cashback, then you would start with a $247,000 mortgage and a rate of 4.99% (based on March 7, 2014..The article is a year old, so we’ll use those rates, not too different from today’s… a fully discounted 5 yr fixed rate was 2.89%)
Monthly payments $1215. At the end of 5 yrs, payments total $72,948 and remaining balance outstanding is $221,762.
With a 5% cashback, the rate was 4.99%. If we put the 5% cashback towards the mortgage day one, you would start with a $247,000 balance.
Your payments would be $1510/mth. At the end of 5 yrs, payments total $90,641… and outstanding balance would be $221,762.
End result is that Cashback is more expensive and inconvenient. Your balance would be $213,450.. (a savings for cashback of $8312) but your monthly payments would be $90,641 vs $72,948.. a savings for no-cashback of $17,693)
Savings for no-cashback is $9381. Not to mention you would have to make those higher monthly payments for 5 yrs.. and if you ever had to get out of the mortgage early, that cashback would have to be refunded to the bank on a prorated basis..
CASHBACK should be avoided whenever possible.
Steve Garganis
I got a 5% cash back mortgage in 31/2 years ago on a 5 year fixed mortgage at 3.5% with the effective rate was under 2% and beat the conventional mortgages on ratespy that I could get by 0.3%. Of course the 40,000 that I got back went right on to the mortgage to make this a viable strategy.