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. Continue reading “Stay away from mortgage cashback offers!”
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.
There are some interesting cashback mortgages available these days…. I’ve been asked if they are worth considering…
Let’s take a look at one of the better ones being offered out there…
The deal is simple.. you must take a posted 5 year fixed rate….currently at a very low 5.39%. You get 5.50% back in cash. Sounds pretty good but how does this compare with taking a discounted 5 year fixed rate of 3.69%?
We’ll use a $200,000 mortgage with a 25 year amortization in this example….
- 5.5% cashback equals $11,000 in cash to you.
- mortgage rate of 5.39% will give you a monthly payment of $1,208.01.
- your mortgage balance after 5 years will be $178,080.91
NO CASHBACK AND A DISCOUNTED RATE
- interest rate would be 3.69%.
- monthly payment is $1,018.70
- your mortgage balance after 5 years will be $173,155.72.
And the end result is…..your monthly payments alone would almost balance out… there is a savings of $358.60 in favour of the discounted rate. But look at the difference in the balance at the end of 5 years…. a $4,925.19 additional savings.
The obvious first choice is to take the discounted rate….but the Cashback is a good option for those that are just starting out or need funds for the initial expenses associated with buying a home…. The best choice for you will depend on your circumstances, goals and plans….. Talk to a qualified Mortgage Broker that doesn’t work for any one bank to understand the differences…