Every once in a while a bank will advertise a cash back mortgage. It sounds great but there are a few things to consider.
When you purchase a home, you may find that you need some extra cash. You may want to renovate, purchase some furniture, or start on building a fence or landscaping.. Fortunately, some Canadian lenders offer mortgages that give you a cash back rebate when you take out your mortgage.
With a cash back mortgage, your lender advances you a cash lump sum when your mortgage closes. The most common sum you receive is 5% of your mortgage amount but it’s possible to get between 1% and 5% depending on the lender you choose. Note that you receive these funds when the mortgage closes. The funds cannot be used for your down payment, however if you borrowed your down payment you could use the funds to pay back the loan.
This sounds like a great idea but there are some down sides to this type of mortgage. First- you will pay about 1.5% higher interest rate for the duration of the mortgage term. Usually this is a 5 year term and if you take a look at how much extra interest you are paying you will find that it takes you 5 years to pay this sum back to the lender.
Another point to consider is that Canadians move on average every 3 years. What if you have to break the mortgage? In that case, you owe the lender the usual 3 months interest or Interest Rate Differential (IRD) as well as the balance of the cash back balance. This could be a very pricy move. If your lender allows it , it’s best to port your mortgage to your new home to avoid the double hit of the penalty and paying the cash back.
A cash back mortgage is a great option but it’s not for everyone. Be sure to tell your mortgage broker if it’s at all possible that you will have to move before your mortgage term is over so that he or she can advise you on what your penalties would be.
(David Cooke is a mortgage broker in Calgary, Alberta Canada. You can visit his website for more information at http://davidcooke.ca