Most people don’t know what a Cashback Mortgage is, I know I didn’t before I started in this line of work.  So what is it?  It’s exactly what is sounds like, when you sign up for a Cashback Mortgage you get some cash back.  That’s it.

So how does it work?

It’s simple, you get a percentage of the amount of money you borrow handed back to you at closing.  Simple as that.  This generally comes in three options, 1%, 2%, or 3% of the total of what you borrow back.  So if you borrow $300,000 you can receive $9000 (3% of 300,000).  Doesn’t that sound great… thanks for using us for your mortgage here is $9000 bucks to do whatever you want!

I can hear you saying to yourself “yeah but what’s the catch”?  You’re right, there is a catch, after all there’s no free lunch, right?  Nobody just gives away free money.

The catch is that you ‘pay’ for this money with a higher rate on your mortgage.  So as of the time I’m writing this blog I can get most people pretty close to a 2% mortgage on a 5 year term, say 2.09% as an average.  If you want to do a ‘3% Cashback Mortgage’ you would be given a rate of 2.79%.  So instead of signing on for a mortgage of 2.09% you sign on for a mortgage at 2.79% and get 3% of what you borrowed handed to you to do whatever you want!

If you’ve read this far I know you’re intrigued, what we need now is a list of Pros, a list of Cons and an example.  So here ya go……

PROS

• You can use the cash to cover closing costs (lawyers and land transfer tax).  These can be thousands of dollars, typically 2% of the purchase price.  If you’ve used all your savings to come up with the down payment (or you just don’t want to be flat broke after the deal) it’s a great way to use the money.
• You can use the money to upgrade your new home.  Lots of times 3% of what you borrowed doesn’t get you as far as you want, but it’s perfect for some minor renovations.  A fresh coat of paint, an upgraded bathroom, or some new countertops can do wonders.   The ‘Cashback’ money can be just what you need to get it done.  If you’ve got big reno’s planned you need to do a ‘purchase plus improvements mortgage’, this is where you borrow something like 20% extra for renovations.  These are also great… but lenders require things like receipts, qualified contractors only, appraisals after the work is done, etc.  It makes sense if you’re the bank, but it can be real pain in the butt for you, and doing the work yourself or having your handy father in-law do it won’t always work.  With the ‘cashback’ money you’re free to channel your inner (insert favorite HGTV show) all you like.
• You can use the cash to clear debt.  This is often the best use for a Cashback Mortgage.  Many times an individual or couple will have a tough time qualifying for the mortgage they want because they have some debts that are eating into their buying power, such as a car payment or credit card debt.  Say you’ve got a car payment that’s $600/month and you have $7000 remaining on that loan.  You can use the cashback money to clear that debt, therefore adding an additional $600 to the monthly mortgage payment you qualify for.  Even if you don’t need to clear a debt to qualify for the mortgage, sometimes it just makes sense clear some debt.  Would you rather have $5000 on your credit card at 18% or have it on your mortgage at 2.79%?
• You can furnish your home.  If I need to write a paragraph to explain this point I can’t help you anymore.
  You can invest the money,  you can take a vacation, you can buy a snowmobile, a car, a laptop, a pair of new shoes every week, and on and on and on.  It’s your money.

CONS

• You pay the higher rate we mentioned.
• You can NOT use the ‘cashback’ money for your down payment. You still need 5% minimum of purchase price.
• Only available on 5 year fixed terms.
• If you exit your mortgage at any point in the five year term you have to pay the ‘Cashback’ money back.   It works like this… if you exit the mortgage after 1 year you pay back 80% of the cashback amount, after 2 years you pay back 60%, after 3 years 40%, 4 years 20%.  It only makes sense for the lender to give you the cash if they can collect the interest.  They gave you the money, it’s only fair.

EXAMPLE

Scenario –  You purchase a home for $320,000.  You put down 5% and mortgage the rest.

That means you had to come with $16,000 as a down payment and you’re left having to borrow the remaining $304,000, add in the CMHC fees of $12,160 and you’re borrowing a grand total of $316,160.00. (I have another blog on CMHC fees if you’re wondering what they are)

With a regular mortgage at 2.09% amortized over 25 years on a 5 year term you’ll have monthly payments of $1352.55.

With a ‘Cashback Mortgage” at 2.79% amortized over 25 years on a 5 year term you’ll have monthy payments of $1462.35.  Plus $9484.80 in your pocket to do as you please.

Now for anyone out there that says that rate is too high and its not worth it, you’re wrong.  Today’s rates are at historical lows and pretty much every year in history other then the last couple a rate of 2.79% was awesome.

So if you’re close to getting into your first home but just need a little extra push to get it done this is an excellent option for you!  Even if (and when) rates tick up another .5% or full 1% above this example, it will still a pretty good deal in the big picture.

That about covers it, thanks for your time, I hope you enjoyed the read.

Dennis McNish

Centum Mortgage Professional