When getting approved for a mortgage, the appeal of the cash back mortgage can be pretty strong. Who wouldn’t want $2000 or $5000 or perhaps even more cash right up front, in their pocket, when the mortgage closes?
Here we will look at the pros and cons of the cash back mortgage and will show that in most cases a cash back mortgage is not the best long term decision for homeowners because it tends to cost quite a bit more money over time than a standard mortgage. In other words, short term gain, long term pain.
For those who really like the idea of the cash back mortgage, there are likely better ways to get the cash back than your Banks first offer.
But first, what is a cash back mortgage and how does a cash back mortgage work?
What is a cash back mortgage?
A cash back mortgage in most ways is just like any other mortgage except for that it provides you with a lump sum of cash on closing. Depending on the lender, this cash can either be deposited directly into your bank account or can be made available as a cheque to you on closing at your lawyers’ office.
How does a cash back mortgage work?
Typically there are two main kinds of cash back mortgages. One is a fixed rate amount of cash that is paid to you at closing, for example $2000 cash back on closing. The other is a percentage based cash back on closing, for example, 1% of the mortgage amount cash back on closing.
While the way in which the cashback is paid to you is different in both of these cases, the function is the same.
Usually, the extra money, in some way or form is tied to a higher mortgage interest rate. So for example: If the lender charges 0.10% more interest, and this is equivalent to about $2000 over 5 years then this is how they can justify providing the extra money, for the extra rate. The problem is, based on this example is that the lender may charge 0.20% more rate (and earn $4000 more profits on the mortgage), even though the cash back is still $2000. So in other words, the lender is making more profit and is distracting the borrower with cash upfront.
With this general idea in mind, let’s turn and look at the pros and cons of the cash back mortgage more specifically:
Pros and cons of a cash back mortgage
- The cash back mortgage can provide you with funds at closing to help move into your new home, or for any other purpose.
- It is a simple and convenient way to access additional funds, all bundled into one payment.
- There are a diverse number of cash back mortgages options out in the market, and some are better than others. If you are interested in a cash back mortgage, then it can pay to shop around or work with your Altrua broker to find the lowest cost, most effective cash back option
- As mentioned, the cash back mortgage is often a very expensive way to access additional funds, bundled into your mortgage. When things in the world of finance are ‘bundled’ together, the cost transparency is lost to a big degree and this is often where the main benefit will be with the Bank – not the customer. The cash up front can be distracting to a borrower, while the Bank is getting what they want over the longer term.
- In many cases, if you need extra money, you may be better off from a financial perspective either using less down payment (to keep more money in hand) or to apply for a separate line of credit to access the additional funds.
- If a cash back mortgage is changed or broken during the term, for example, if you move during the term or if you want to refinance the mortgage for additional funds or a lower rate, then the cash back must be repaid, possibly including a penalty or repayment premium. This creates a less flexible mortgage structure with a hidden ‘catch’ in it.
- The cash back can not be used directly for closing costs or towards down payment. Because the cash is made available right after closing, as opposed to before closing, it is not available for the home purchase process.
The cash back mortgages is seen as a shortcut that has longer term consequences. However, if you are still interested in a cash back mortgage we can ensure that you obtain the best possible financing that saves you the most on this type of mortgage.
Our goal is to provide the best possible mortgage information and advice, so that they have more money to enjoy for themselves and their family.