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 firstname.lastname@example.org
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.