Buying a home can be one of the most financially stressful decisions we are faced with in our life times. Many first time home buyers feel like ripping out their hair while trying to come up with their down payment. You may have heard about the Cash-Back mortgage and think it sounds like a dream. Who wouldn’t want to buy a house with some down payment and get that money back on closing? We’ve been in this business a long time and we’re here to give it to you straight: cash-back mortgages may sound appealing but in the end they’re not always the best option.
A cash-back mortgage basically means you’ll be provided with a lump sum of cash immediately on completion of the mortgage transaction. The amount of cash is usually calculated as a percentage of the overall loan amount which, for most lenders, is usually 5%. It sounds very attractive and obviously a plump cheque to cover the cost of new appliances for your brand new home is quite tempting but be careful, there is a catch. With a cash-back mortgage comes a higher interest rate.
Ask yourself what the cash will be used for and is the purchase worth it? The extra cash for a new kitchen, appliances or backyard renovations may be a high priority right now but think of what you’ll be paying in interest over the life of your mortgage. Let’s use this example: your cash-back option pays 1% of the mortgage amount on a 2 year deal, 3% on 5 years and 5% cash-back on a 10 year closed mortgage. If you’re borrowing $100,000 for a 5 year term with a 25 year amortization, your cash-back option would give you $3,000 up front with a rate of 6.60%. Over your 5 year term you’d pay about $6,400 in interest. That’s double what you would pay without the cash-back option over 5 years!
Banks love this product because the money essentially goes right back into their pockets. The borrower pays significantly more in interest and the banks are the ones that are benefiting. Your monthly mortgage payments will be higher and can impede your monthly cash flow. Think about it this way; a cash-back mortgage will end up costing you more in the end and that is a stress you don’t want to have to deal with!