Posted on February 19, 2014

Cashback Mortgages: What You Need To Know

If you’re a first-time homebuyer, you have probably considered opting for a cashback mortgage to help with your down-payment, closing costs, legal fees, moving costs, or home furnishings. With most major Canadian banks offering cashback mortgages that give borrowers up to an additional 5% of their mortgage back in cash, an increasing number of first-time homebuyers choose to go this route to make purchasing their first home and entering the real estate market just a little bit easier.

However, although moving into your home with cash in your pocket may seem like a great idea, it’s important to remember that, unfortunately, nothing in life is free. Make sure you know exactly what you’re signing up for and exactly what your 5% will cost you in the end. If after weighing the pros and cons you still want to opt for a cashback mortgage and benefit from some financial peace of mind, you’ll be able to put your money to best-use and confidently indulge in some new home furnishings or pay your closing costs with ease.

The Need-To-Knows:

THE GOOD

If you’ve been saving for your down-payment for a while, yet don’t have quite enough to jump on a great real estate deal, a cashback mortgage can help fill in the gap and get you into your dream home. Investing in B.C. real estate is generally quite safe and your home will likely increase in value over time; therefore, if you can bite-the-bullet on the additional interest charges, it may pay off for you in the end.

Even if you can cover your down-payment, many additional costs come up when purchasing a home such as inspections, legal fees, closing costs – and then you have to furnish the place! If you already have cash in the bank to cover these expenses, that’s of course your best option so you don’t incur any additional interest charges. However, if you don’t, using a cashback mortgage is probably a better option than adding these charges to you credit card. The mortgage interest rate will most certainly be lower than what you have from Visa, Mastercard, or American Express.

THE BAD

As stated earlier, nothing in life is free. Your 5% cashback mortgage is going to cost you. First of all, know that you most likely will no longer be eligible for a variable-rate mortgage, which, if history proves anything, is generally the best deal for Canadian homeowners. Additionally, your overall mortgage rate will be higher than non-cashback mortgage options. In the end, your 5% cashback will likely cost you more than the money was worth itself.

In an example scenario by True North Mortgages, given a 6.49% cashback interest rate vs. a 4.89% non-cashback option, 5% cash back on a $100,000 mortgage would cost the borrower an additional $7574 on a five-year term. That's a large fee to pay for a mere $5000. 

THE UGLY

If you think perhaps it's a good idea to opt for a cashback mortgage to pad your pockets in case additional costs come up, think again. Unfortunately, banks won't let you retreat on your decision, a.k.a you cannot just pay back the cash if you don't use it. Instead, you'll suffer stiff financial penalties that really outweigh any potential benefits. Furthermore, if there's a chance you'll sell the property prior to finishing your term, you'll owe your mortgage provider the difference, cutting in to any capital gains you may have received. 

All this said, each and every home buyer has to make whichever decision is best suited to his or her needs. Talk to your bank, mortgage broker or financial advisor to find out what is best for you.