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Cash back! $10,000, $20,000 or more.
Your bank or mortgage lender is going to give you one per cent to five per cent of the principal amount of your mortgage after closing. Sounds like a great idea. (Side note – the funds cannot be used for your down payment as that option is no longer available in Canada.)
But there could be an unexpected catch if you haven’t done your homework. Several of my clients have had an unpleasant surprise – if you break your mortgage early, you will have to pay back all or a pro-rated portion of the cash back incentive you received.
You will also have to pay the standard prepayment penalties to your bank, which makes it almost impossible to leave your current mortgage lender if you currently have a Cash Back mortgage.
Like all mortgage products you need to decide whether a cash-back mortgage is good fit for you and fully understand the details, which I will recap below.
It’s important to understand the full costs of a Cash Back mortgage as they will cost you more.
- Cash back mortgages are only available on fixed-term mortgages of five years and are not available for variable-rate mortgages. The mortgage must be insured or insurable so that means the property value can’t be any higher than $999,999.
- The rates are higher than a standard mortgage. The difference you pay in interest between a lower rate standard mortgage and a cash back mortgage could be higher than the cash back amount you received as you are paying a premium for this type of mortgage.
- The cost of breaking the mortgage early will not only be the standard prepayment penalties, but you may have to repay the full cash back amount or a pro-rated amount depending on the lender’s terms. It’s not free cash.
- Some lenders lock you in for the first three years of your mortgage, so there is no option to break the mortgage early regardless of the reason.
- There is a minimum credit score requirements to qualify.
- Available for purchases and mortgage transfers of owner occupied homes only and not second homes or rental properties.
Purchasing a home comes with many expenses besides saving for the down payment. The cash-back funds can be used for covering closing costs, moving expenses, renovations, paying off debt so really any reason you may want the additional cash.
As a mortgage broker, I have several lenders that offer various types of cash back mortgages but they are not offered by all lenders. We will review your personal situation to ensure that you are fully aware of all the pros and possible cons of committing to this type of mortgage.
It’s important to read all of the fine print and under the potential consequences. A mortgage broker is the best source to explain this type of mortgage.
If you are interested in learning more about a Cash Back mortgage or if you currently have a Cash Back mortgage and have questions please give me a call as I’m happy to do a review with you.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
