Many lenders advertise their cash back program saying, “Get $ 5,000 with your mortgage. Generally, cash backs vary between .50% and 5% of the amount borrowed depending on each bank and their policies. The client will receive his cash back only at the closing of his loan when he has passed to the notary.
In the past, Cash Back was very interesting for those who did not have a down payment. Nowadays, a minimum of 5% down payment is required from the outset by the bank and can come either from our own savings or a donation from a family member.
Cash back mortgages have several advantages
For those who buy, be it the first or the tenth property, the rebate could help them with the welcome tax, make minor renovations or repairs, or buy new furniture. For those with several high-interest debts, the rebate could help them pay down these debts and lower their overall borrowing cost and free up their cash flow.
Cashbacks are available to all homeowner and non-occupant homeowners as well as those who refinance their existing property.
It is important to consider other features of cash back mortgages
The major disadvantage is the high cost of the discount in terms of interest rates as well as the total cost of interest paid during the term. When a customer takes a regular mortgage, he receives a reduced rate, however with the cash back he receives the posted rate which is at can loan twice as much as the reduced rate. For example, if the customer takes a mortgage over 5 years without discount, its rate is 3.39%. With a discount, it would have the posted rate of 5.34%.
Also at this rate, it is much harder to qualify for a mortgage for those with lower wages, as this raises the payments and qualification ratios that the bank uses to qualify clients. In the end it is a more expensive option and costs the customer double the interest for its discount.
In addition, it is important to know that the bank has a “Claw Back” clause which indicates that if ever the client wants to end its term either to transfer his mortgage to another institution, refinance, or repay the mortgage in case of sale, the cash back must be repaid to the bank. For some banks, it is the totality of the discount, for others it is an amount calculated pro rata according to the time remaining in the contract, which raises the penalty considerably.
Another disadvantage is that the discount is not available
For those who take a variable rate. For those who can tolerate fluctuating payments or variable rates take advantage of the potential to save a lot of long-term interest according to many statistics. This is not the case with cash back.
In general, cash back would be attractive for those who are comfortable with higher payments and who need additional funds to cover expenses, debts, or simply to have a small contingency fund for unexpected expenses of a property.