What is a cash-back mortgage?
Buying a home is a significant financial investment. Saving for a down payment can leave you short of funds for other home expenses like closing costs, improvements, furnishings, and landscaping. For this reason, a cash-back mortgage may be an option to consider.
You can get up to 7% cash back on your down payment and closing fees with a cash-Back mortgage. This extra money can be very helpful for first-time buyers who need to purchase items like blinds, carpet, appliances, or even furniture to turn their house into their home.
Cash-Back mortgages are quite popular in Canada, and it comes as no surprise that first-time buyers make up the bulk of customers.
Who is a cash back mortgage for?
- You want to borrow money to pay closing costs like transfer taxes or legal fees.
- You are aware that the house needs significant upgrades or repairs.
- Your new home needs to be furnished.
- For the first several months after buying a property, you may need extra cash.
- You’ll need extra money to cover moving expenses.
- You have high-interest debt or student loans that you’d like to pay off.
- You wish to invest or increase your savings.
- You have a lot of debt with a high interest rate, and you want to pay it down.
- You’ve saved enough to buy a home, but you expect to be short on cash after the mortgage closes. The lump sum from the cash-back mortgage can help you get through your first few months as a homeowner.
- You withdrew funds from your RRSPs through the RRSP Home Buyers Program. Now you need additional money to cover post-purchase expenses.
- Your family members gave you money to go towards your down payment, but you might still need some more before you commit to this new financial obligation.
How does a cash-back mortgage work?
After your mortgage closes, the lender will give you a lump sum of cash if you choose a cash-back mortgage. Upon closing, a predetermined portion of the property’s value will be loaned to you as a rebate. Some lenders may offer anywhere from 1% to 7% cash back. The most typical amount given is 5% of the mortgage amount.
In other words, if you borrow $400,000 to finance your property with 5% cash back, your lender will give you an extra $20,000 (5% of $400,000). This would result in a total mortgage amount of $420,000. Although the funds are available for use anyway you like, they are primarily intended to assist buyers who are struggling to come up with the necessary 5% down payment (the minimum down payment needed to purchase a home with a conventional mortgage).
It is worth noting that only the initial $400,000 would be recorded as a mortgage.
It is vital to note that these funds are not considered borrowed. This amount is not even reflected in the principal of your mortgage. Instead, the bank will charge a higher fixed interest rate in order to recoup its initial investment. There is no cash-back option available with variable rates.
Over the life of your loan, the higher interest rate will more than make up for the extra cash you received up front.
What are the advantages?
- Get your hands on some cold, hard cash immediately after closing.
- Pay both your mortgage and cash-back loan with a single monthly payment.
- Numerous options on the market, allowing the Team at Budget Rates to comparison-shop for the best rates and terms
What are the disadvantages?
Interest rates are higher than on a standard mortgage.
The additional interest makes up for the funds your lender is able to lend you.
Qualification requirements might be more stringent.
Even if we enjoy where we work and live, every location has its cons.
Owning a vacation home allows you to build community over the course of a few years, and you may eventually end up retiring there if you have firmly planted roots that develop there over time.
Having a second home to escape to during the months we despise at our primary residence is a popular retirement goal. Finding and purchasing a second home in advance of retirement gives you the opportunity to enjoy the advantages of a location well before you actually retire, giving you time to make adjustments to your plans if you find that the location is not what you expected.
No variable-rates
Variable rates are not available for cash back mortgages. Many consumers prefer the concept of a variable-rate mortgage when interest rates are anticipated to drop in the near future.
You’ll probably pay more than twice as much at the posted rate with a cash-back mortgage.
Penalties for claw backs
If you sell your property in the future, settle your mortgage, and do not use the proceeds to buy a new home, you may be penalized.
Inaccessible to subprime borrowers
You must have excellent credit for a lender to approve you for a cash back mortgage.
A higher credit score may be necessary to be approved for high-ratio cash back mortgages.
What do I need to get started?
With the money from a cash-back mortgage, you could invest it, make some much-needed repairs to your property, or do both. Just keep in mind that you might be required to pay back the entire cashback amount if you decide to pay off your mortgage early.
If you have questions, or if you feel this may be the solution for you, book some time with us so we can:
- assess your requirements
- then start the mortgage application!
