You may have heard of a cash back mortgage, and at first it may sound like a great option to consider. When buying a new home you may need some extra funds for renovations, decorating, improvements to the land, or maybe even a driveway or fence. The good news is that some Canadian lenders offer a cash back mortgage that allows you to get a cash back rebate when you purchase your mortgage product with them. So what’s the catch?
With this mortgage option, you will receive a cash advance in a lump sum when your mortgage closes. Often this is 5% of your mortgage total, but this rate can vary from 1%-5% depending on the lender. Since you get these funds when your mortgage closes, you cannot use them for your down payment directly, but you may use them to pay back any money that you did borrow for that payment. But it is important to consider the other conditions that come with this mortgage type such as a higher interest rate. Typically the interest rate on a cash back mortgage will be around 1.5% higher than average, and this lasts for the whole duration of the term (usually 5 years). Also, if you choose to break your mortgage you will have to pay back the usual fees (three months of interest or the Interest Rate Differential) along with the cash back balance. If you are planning on breaking your cash back mortgage by moving before your term is up, see if your lender will consider transferring your mortgage to your new home in order to avoid costly penalties.
While some people love cash back mortgages, it is not the right option for every situation. If you would like to explore your mortgage options, including potentially applying for a cash back mortgage, contact me today.