About twice a year, one of the big Canadian banks likes to run an advertising campaign for their cash back mortgages. These are mortgages usually have a 5-year term where you receive a certain percentage back in cash. The percentage varies from 1% to 5% in most cases. Sometimes when someone purchases a house, all of their money goes toward their down payment, leaving them with nothing left over for things like building a fence, landscaping, buying window coverings etc. The idea with a cash back mortgage is to use the money for these things so that you can get them done as soon as you move in rather than waiting until you’ve saved up enough. In many cases, you can also use the cash back mortgage to help pay for your closing costs.
1. There are multiple lenders who have cash back mortgages. Don’t jump at the first one you see. They all have different terms and conditions.
2. You are really getting a loan on top of your mortgage. The interest rate is calculated so that by the end of the term you will have paid the lender back the money they gave you and a little bit extra. Sometimes this little bit extra maybe twice as much as you got in cash back.
3. The average cash back mortgage is a 5-year term. Most Canadians move every 30 months. Therefore when you break a cash back mortgage you have to pay a penalty as per usual but you also have to pay back a portion of the loan that they gave you. If you are 36 months into a 60-month mortgage, you have to pay them back 2 years’ worth or 40% of the cash back. Combined with the penalty this can be a hefty sum. In addition, there are some lenders who require you to pay back 100% of the cash back if you want to break the term.
Before signing for a cash back mortgage it’s better to discuss your needs with your local Dominion Lending Centres mortgage professional. They can advise you on cash backs, line of credit, Purchase plus Improvements or Flex Down mortgages which may be better for your situation.