Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Cash-back mortgages in Canada are somewhat popular among borrowers. For some borrowers, extra cash in their hand after closing the deal is a good choice. Not everybody look for a cash-back mortgage, rather some look for the best interest rate. Regardless of what they are looking for – end of the day all that matters is the cost of borrowing.

Do we really need a cash-back mortgage? That is the question. Before we find out about the cash-back mortgage, we should know why a borrower wants cash-back mortgage.

As we said earlier, having some extra cash after purchasing the house is a good option for some borrowers. There are many expenses to cover after purchasing the house. Some wants to decorate the house, while some will be looking towards buying a new car. The cash comes in handy in all those situations.

If extra cash after closing the house is badly needed by a borrower to cover for additional expenses then probably he shouldn’t have bought that house. Stretching one’s borrowing ability to the extreme is not a good idea. On the other hand if you use the cash-back to pay off the mortgage itself, then it may not be a bad thing to do. Whether it is good or bad depends on the borrowing cost in the end of the term.

cash-back mortgages often come with higher interest rates, they come with higher interest rates for obvious reasons. A lender who is giving the borrower an additional sum at the time of lending the money  needs to take that amount back. Or else there is no reason to be in business.

What to look for in a cash-back mortgage

  1. The first and foremost thing you should ask the lender or the bank – what are the penalties of breaking the mortgage? Generally, the penalties for cash-back mortgages are extremely high. Not only have to pay the cash-back portion back (entirely) but also you have to pay the complete interest rate differential if it is fixed rate mortgage. Yes, cash-back mortgages are generally fixed term mortgages. Terms varies from three years to five years or higher.
  2. The next thing you should pay attention to is the cost of borrowing. Looking only at the monthly payment will not help us to understand the total cost of borrowing. There are many things before and after the interest rate which can jack up the cost of borrowing. So you should look at the complete cost of borrowing till the end of the term. Just ask the lender, he or she will provide you with a complete cost of borrowing disclosure.
  3. The third thing you should pay attention to is the miscellaneous cost of this mortgage. How must you have to spend on the lawyer, appraisal cost, existing mortgage payoff cost and many more. Sometimes these small changes we eat away your savings.
  4. Sometimes there will be restrictions on a cash-back mortgage. Such as registering another mortgage behind the first mortgage may not be allowed. Getting a HELOC on the property may become more difficult.

As you can see cash-back mortgage may sound attractive but there will be fine prints. If you are sure that the cost of lending is much lower than the alternative option then you should seriously think about getting a cash-back mortgage.

If there are possibilities that you may end up moving away from the existing property and sell it before the mortgage term expires then a cash-back mortgage may not be the best choice for you.
Consider all options then decide what is going to work the best for you.

Please let us know what your thoughts on this topic are.

1 Comment
  1. This was a very nice post. You’re right when you say that first we need to understand what is the cash-back being used for in order to be able to give the correct advice! Personally if the person doesn’t have a down payment at all sometimes getting a cash back is probably better than borrowing money on a Visa which is very high interest. I personally find cash back mortgages are pretty good products.

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