19 Jun
If you are planning on moving to a new home, then you may not be able to cover all of your expenses at once. Moving into a new home often comes with additional expenses, such as needing to buy new appliances and furniture, as well as home renovations that can quickly lead to substantial debts if you lack sufficient funds. However, there may be a solution to help you pay for many such expenses, and that solution is a cashback mortgage. Here, we will discuss everything you need to know about cashback mortgages in Canada and how your household can benefit from them.
What is a cashback mortgage?
A cashback mortgage allows new homeowners to have some money on hand after they have moved into their new home. It essentially serves as a cashback rebate, whereby your mortgage provider provides you with a cash lump sum after the terms of your mortgage have been finalized. The typical amount that you may be eligible to receive after your mortgage closes is 5%, but it can range anywhere from 1% to 7%, depending on who your lender is.
A Tangible Example
To illustrate how a cashback mortgage in Canada may work, let us imagine that you have purchased a new home for $350,000 and that you have placed a downpayment of 20% ($70,000) on your new home. In this scenario, let us also imagine that you have signed onto a five-year fixed term, with an interest rate of 3.79% and a cashback rate of 1%.
In this particular example, you would be eligible to receive a cash lump sum of $2,800, which could be invested in renovating home or on purchasing new furniture or appliances, such as a futon or dishwasher. Moreover, to calculate the cashback amount, we substrated the $70,000 downpayment from the home’s $350,000 price, leaving us with a mortgage amount of $280,000. Then, we multiplied the mortgage amount by the cashback percentage to determine the cashback amount that you would be entitled to in this scenario.
Different Rates and Terms
It is important to note that different lenders will offer their clients with different cashback mortgage rates and terms. For instance, while certain banks may only offer a 1% cashback amount, others may offer a percentage as high as 7%; albeit, most lenders in Canada will offer their clients with a cashback rebate of up to 5%.
Furthermore, the available terms will also vary from one financial institution to another, as some may offer a term as short as a year, while others may offer a 10-year term. Generally speaking, fixed terms are offered in increments of 1, 3, 4, 5, 7, and 10 years, respectively, but certain lenders in Canada may offer differing terms. As such, it is best to perform the necessary due diligence to determine which rate and term works best for your needs and the needs of your family.
More than Meets the Eye
As we have seen thus far, cashback rates and terms can vary greatly, depending on the lender that you decide to partner with. However, there are some constancies that apply to all cashback mortgages that you should be aware of. For instance, all cashback mortgages in Canada come with an interest rate that is fixed instead of variable.
In addition, the rate itself is almost always higher than a conventional mortgage in this country. Interestingly, the reason why the rate is fixed, and why it tends to be higher than a typical mortgage in Canada, is because the lenders need to compensate for the extra money that they doled out, upfront, to their clients.
Again, to illustrate, let us go back to our previous example, where the interest rate on the five-year fixed term was 3.79%, with a cashback amount of 1%. However, if you were to opt for a five-year fixed rate mortgage without a cashback policy, then your interest rate would be lower at, say, 3.25% instead of 3.79%. Now, the difference may seem negligible, but, in reality, nothing could be further from the truth.
That is, in this scenario, your cashback interest would be $49,321 (with a mortgage of $280,000), whereas your standard interest on a conventional mortgage would only be $42,143. As such, you would be expected to pay $7,178 in the form of extra interest payments with a cashback mortgage of 1% ($2,800 upfront lump sum payment). Hence, while you would receive $2,800 in the form of an upfront lump sum payment in this case study, the additional interest you would have to pay back to your lender in the long term would be $4,378.
When to Choose a Cashback Mortgage
While cashback mortgages may have certain drawbacks, they also have certain unique advantages. For instance, the cashback amount that you receive, which can amount to tens of thousands of dollars, is tax free in Canada, and you will be allowed to use it for anything that you want to.
For instance, you can use the money to pay down a high interest debt or to invest. You can also directly transfer the money to your savings account, or use it to pay for furniture or home renovations for your new home. Some Canadians may also opt to use the lump sum to help supplement their cash flow during the first few difficult months of owning a new home, or they may decide to use the funds to pay off their land transfer tax, legal fees, or other associated closing costs. If you would like to learn more about the benefits of cashback mortgages in Canada, then please visit Mortgages Mortgages at our website or give us a call at 866-307-0747.