Cash Back Mortgages – There’s no FREE Lunch!!

KellyHudsonMortgages • January 30, 2016

Cash Back Jan2016

You often see Cash Back Mortgage ads as a lure from the major banks offering cash back incentives on their Mortgage products. Cash back mortgages are becoming increasingly popular among borrowers, particularly those who have limited down payments.


So here’s some quick words of advice.  STAY AWAY FROM CASH BACK Mortgage offers!

What is a Cashback Mortgage? The deal is simple. Various lenders offer cash back programs, allowing a percentage of the property’s Mortgage value to be rebated to the borrower upon closing. The bank gives you cash up front to use however you want, except as the down payment .

The cashback on mortgage option can definitely help when it comes to paying closing costs, but borrowers should be aware that these products come with catches:

1) Higher interest rates The cost of the upfront cash is a much higher interest rate — usually about 2% higher than a Mortgage Broker negotiated rate. The higher interest rate is what pays for the cash the bank is “giving” you.

The homeowner would be pay a significantly higher amount of interest over the term of the mortgage. Homeowners need to crunch the numbers to calculate what’s more worthwhile:

  • Continue to rent and save for your down payment & closing costs
  • Overpay in interest, with the hopes of becoming a homeowner and eventually compensating for the higher interest rates with a possible increase value in the property.
Cash Back Mortgage Amount Mortgage Broker – Mortgage Amount Difference:
Mortgage Amount: $400,000.00 Mortgage Amount: $400,000.00  
Interest Rate: (%) 4.99% Interest Rate (%): 2.99% 2.00%
Amortization: 25 years (300 months) Amortization: 25 years (300 months)  
Term: 5 years Term: 5 years  
Payment Frequency: Monthly Payment Frequency: Monthly  
Compounded: Semi-annually Compounded: Semi-annually  
         
MORTGAGE SUMMARY (based on the above terms)
Payment Amount: $   2,324.14 Payment Amount: $   1,890.93 $ (433.21)
       Total Interest: $ 93,422.98     Total Interest: $55,288.49  
       Total Principal: $ 46,025.42     Total Principal: $48,167.13  
Total Payments: $139,448.40 Total Payments: $103,455.62 $(35,992.78)
Balance Remaining @ Maturity: $353,974.58 Balance Remaining @ Maturity: $341,832.69 $(12,141.89)
Difference       -$48,134.67

$48,000 difference over 5 years. It’s pretty clear why a Cash Back Mortgage is not a great deal for the consumer and why I discourage it’s use.

2) Clawback penalties: If you need to break your mortgage, whether to sell or refinance your home before your mortgage term is complete.… you have to pay the Penalty PLUS return the Cash Back portion to the bank. The Cash Back Penalty is sometimes prorated sometimes NOT depending on the lender, check the fine print of your contract.

3) Variable rates are not available: Another downside to cash back mortgages, is that they are not available for variable rates. For people who can tolerate fluctuating variable interest rates, variables have shown the potential over the long term to save you interest. That option is not available with a cash back mortgage.

4) Limited availability: Most lenders offering Cash Back Mortgages are looking for A+ borrowers with a solid credit profile, steady provable income, and typically 5% or more down payment.

5) The Office of the Superintendent of Financial Institutions (OSFI) reiterated it doesn’t like the Cash Back Mortgage practice at all, recommending mortgage default insurers not underwrite loans that use cash back for a down payment.

READ the FINE PRINT – Many people miss the fine print on lender’s websites and in their mortgage contract. When a deal seems to be too good to be true, there is always a catch… There is NO Free lunch!

If you have any further questions about cashback mortgages or any other mortgage products, please call me at 604-312-5009

Kelly Hudson

Mortgage Expert

Mobile: 604-312-5009

Kelly@KellyHudsonMortgages.com

www.KellyHudsonMortgages.com


 

Kelly Hudson
MORTGAGE ARCHITECTS
RECENT POSTS 

Getting a Mortgage After Separation or Divorce in Canada: What You Need to Know

By Kelly Hudson • February 14, 2025
Separation and divorce are major life events that significantly impact finances—including homeownership. In Canada, approximately 40% of marriages end in divorce , making it a common challenge for homeowners. As a mortgage broker, I work with many clients who are navigating the challenges of keeping or selling their home, refinancing, or qualifying for a new mortgage post-separation. Lenders assess these applications differently than standard ones, particularly when it comes to income, debts, and liabilities . Whether you want to stay in your current home or move on to a new one, understanding your mortgage options is essential. How Separation & Divorce Impact Your Mortgage When separating from a spouse, one of the biggest financial decisions is what to do with the family home. Here are some common scenarios: 1. Keeping the Home If one spouse wants to stay in the home, they must refinance the mortgage to remove the other person’s name from title and buy out their ex’s share of the equity. 2. Selling the Home In some cases, selling the home and splitting the proceeds is the best financial option. This provides a clean break but requires both parties to qualify for new mortgages if they wish to buy separate homes. 3. Co-Owning After Separation Some ex-partners choose to co-own the home for a period, often for the sake of stability for children. While this may work temporarily, it will complicate future borrowing power . 4. Existing Mortgage Responsibilities Even if a separation agreement states that one party is responsible for the mortgage, lenders will still consider both parties liable unless the mortgage is refinanced and the ex’s name is removed from the title & the mortgage. Important : If both names remain on the mortgage and your ex stops making payments, your credit score and future borrowing ability will be affected .

BC Property Assessment vs Home Appraisal (revised Jan16-2025)

By Kelly Hudson • January 21, 2025
What is BC Assessment? It’s January and in BC homeowners are receiving their property assessments. BC Assessment is a provincial Crown corporation that values all real estate property in British Columbia. Every year, BC Assessment sends property owners a Property Assessment Notice telling them the fair market value of their property as of July 1 the prior year . To see the most recent assessment for a property, click on BC Assessment and type in the property address. The real estate market is the single biggest influence on market values. Market forces vary from year to year and from property to property. The market value on an assessment notice may differ from that shown on a bank mortgage appraisal or a real estate appraisal because BC Assessment’s appraisal reflects the value as of July 1 of 2024 , while a private appraisal can be done at any time. The assessed values are based on limited information and are a result of algorithms and mass appraisal techniques which have their limitations. BC in general A new report forecasts the average price of B.C. home in 2025 at just over $1 million — the highest in Canada, some $280,000 above the national average. These figures appear in the latest forecast from the Canadian Real Estate Association released Jan. 15, 2025. Factors The increase in home prices was driven by a decrease in fixed mortgage rates and expectations for future Bank of Canada rate cuts. Use your BC Assessment as a starting point for the value of the property you’re planning to purchase… Do not rely on BC assessment for the exact value of the property you’re considering purchasing. Markets in BC change quickly both increasing and decreasing in value depending on the area and the economy.
Share by: