The Cost of a Cashback Mortgage?

I often get asked whether a cashback mortgage is a good option for borrowers. While a cashback may seem attractive, be aware that unlike other cashback products, mortgage cashbacks are not free. Lenders will increase the interest rate to cover the cost of the cashback.

One cashback product to consider is TD Canada Trust’s 7 yr, 7% cashback product. This product is offered by Invis (www.BCmortgage.ca). The current interest rate on this mortgage is 7.7%. You may think that this is a high rate of interest but this is because you get 7% of the mortgage amount interest-free. Yes, it is still more expensive than a traditional mortgage. For example, on a $300,000 mortgage (where you get a cashback of $21,000 or 7% of $300,000), you would pay interest over a 7 year period of $156,608. If you took a standard (i.e., no cashback) mortgage, and paid the current 6.2% interest on a 7 year mortgage, you’d pay total interest of $125,555. That’s a difference of $31,053. We still have to deduct the cashback of $21,000 to arrive at the net cost of $10,053 (or $31,053 less $21,000).

In essence, you’ve spent approx. $10K to get a $21K cashback. Is this worth it? For most people, the answer is no. However, if you are cash strapped or would like to purchase furniture or need money for legal costs, this could be a solution for you.

Besides the added cost of a cashback, borrowers have to be aware that cashbacks are only available for fixed mortgage terms. There are no variable rate mortgages that offer a cashback. This is a major disadvantage since this precludes you from enjoying the lower interest rate of a variable rate mortgage. Secondly, if you were to break your mortgage, you would have to return a pro-rata share of the cashback. For example, if you were to break your mortgage on the 5th year of a 7 year cash back mortgage, you will have to return 2/7th of the cashback you received when you took out the loan.

There are many lenders offering cashbacks. Since most consumers will not have the software to analyze each offering, we suggest you consult a mortgage broker at Invis (BCMortgage.ca) to help you decide which cashback offering is the best one to take.