The old Cashback mortgages
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.
Retirement means different things to different people. One thing we can all agree on is that we don’t want to run out of money…
Reverse Mortgages seem to be gaining some attention in the media again…. I thought it might be worth bringing or sharing some thoughts… here’s a recent article.
A Reverse Mortgage will give a lump sum of cash or monthly payments for life or a combination of both… it’s all tax free money…. Ok, that does sound good..
But upon closer inspection, we see that the interest rate is around 2% to 3% higher than what you can borrow money at for similar fixed rate products. 5.90% vs. 3.50%. Remember, you are borrowing money and NOT paying it back.. the interest just accumulates and compounds… there are also appraisal fees, administration fees, legal fees… and if you want to sell your home and pay this off, you face huge penalties that could range from 11 months worth of interest to 4 months of interest….Yikes!
Another alternative would be to borrow a secured line of credit at Prime plus 0.50% with interest only payments…. currently, that rate would be 3.50%….
I remember when these products came out in the mid ’90s.. they were horrible… they have changed and rates are a little better, but my advice is talk with a qualified Mortgage Broker or Financial Planner before making any decision…
My last thoughts… I wouldn’t put my parents into one of these products…..
I’ve had some inquiries about taking a 1 year and 3 year fixed rate…and for good reason. A 1 year fixed rate can be had for about 2.50% and a 3 year fixed rate is 2.90%. This does make going with a shorter fixed term an attractive option if Bank Prime rate continues to increase.
Best Variable rate is around Prime less 0.65% or 0.70% for qualified applicants with some conditions…. that puts the Variable rate at 2.30% or 2.35%…
I like Variable rate mortgages for many reasons but these shorter, fixed terms can be a good alternative.. Make sure you understand all the terms and conditions… speak with a qualified Mortgage Broker.
Is it just me or are the Banks pushing these Hybrid Mortgages more these days…? RBC recently reported that 40% of Consumers buying a home in the next 2 years would consider a Hybrid Mortgage…
Wow! That’s much higher than any figure I’ve seen… And it doesn’t reflect the current level of Consumers that currently have a Hybrid mortgage. (current figures are at 6% according the Canadian Association of Accredited Mortgage Professionals).
Globe and Mail’s, Chaya Cooperberg, took a closer look at this product…..Oh, and by the way, a Hybrid mortgage simply splits your mortgage ….. part fixed rate and part variable rate. The theory is that you can benefit from today’s lower Variable rate but also secure a fixed rate to protect yourself from future rate increases…. Sounds great but these products are flawed and DO NOT work in the Consumer’s favor.
Here’s what you need to know:
-studies point to Variable rate mortgages as having the lowest rate of interest over the life of your mortgage.. they just save you money….(your rate fluctuates with Bank Prime…up and down)
-fixed rate mortgages buy you the security of knowing what your rate and payment will be…but the key word here is BUY. Your paying for this insurance with a higher average rate over the life of your mortgage… (plenty of studies out there to show this).
-combining these 2 products in one mortgage will limit your options… there is a portability feature but it’s not straight forward and we’ve received different explanations on how this actually works….. these mortgages are not transferable to other financial institutions….
-many borrowers that are currently in these products have staggered maturity dates meaning they can never get out without paying some sort of penalty…….
A better alternative to getting part fixed and part floating, is to go with a Secured Line of Credit.. the Floating portion is Open to repayment without penalty… Keep in mind these products are not portable to a new home and they are not transferable…At least you won’t get stuck with a penalty…
One of the most under utilized mortgage strategies is the Australian Mortgage. The Australian Mortgage uses an All-in-one mortgage product to minimize how much interest you pay over the life of the mortgage. The product gives you full credit for any savings in your bank account by applying this immediately to your mortgage balance. The result is a shortened amortization that ranges from 5 to 10 years, depending your situation.
This isn’t for everyone….. The product is for those that earn a fixed income or have a steady pay cheque. You also need a surplus every month…make more than you spend…it’s certainly worth a look at renewal time….