Posted by John Doe
Canadian banks know that many potential homebuyers aren’t keen on signing on to a 30-year mortgage. That’s why at least two times a year some of the major Canadian banks advertise mortgages with cashback. It might seem tempting to apply for a cashback mortgage because from the outside, it looks like you’ll get back free money.
However, it’s important to mention that mortgages with cashback have several stipulations that you should be aware of. So, before you apply for one, we will explain the 10 important things you might not know about mortgages with cashback in Canada.
What is a cashback mortgage?
A cashback mortgage allows you to receive up to 5% from your down payment and closing costs. For example, if you take out a $500,000 mortgage, you’ll get $25,000 back. That $25,000 could be used by home buyers who would like to invest in several home renovations such as new floors, furniture, or appliances.
10 Things You Might Not Know About Cashback Mortgages
If cashback mortgages offer incentives to home buyers, why would anyone want to apply for a conventional mortgage? As attractive as cashback mortgages might be, though, you need to be aware of the following 10 items before agreeing to one:
1. Compare Rates
Shop around for the best cashback mortgage, as banks have different terms and conditions. Do not sign up for one until you compare what other lenders offer.
2. Not Everyone Qualifies for a Cashback Mortgage
Cashback mortgages are usually approved to those individuals who work on salary or by the hour. Those who are self-employed, contract workers, or freelancers are not seen as ideal borrowers, and are more likely to get disqualified.
3. Work with a Mortgage Broker
Not all banking institutions offer cashback mortgages. There are specific lenders who offer cashback mortgages, so it’s important to have a mortgage broker who has experience with them. Working with a mortgage broker can help incredibly, as they are skilled in matching your financial situation with the correct lender.
4. Use the Cashback for Paying Off Other Debt
The percentage of cashback mortgages varies from 1% to 5%. Many homeowners take on a cashback mortgage in order to invest in upgrading their homes by buying new furniture or developing a nice landscape. For those who have other arrears, though, having a cashback mortgage is useful for paying off high-interest debt.
5. The Higher the Cashback You Want, the Higher Your Credit Rating Should Be
A 5% cashback mortgage is considered a high-ratio cashback mortgage. If your goal is to get a high-ratio cashback mortgage, then you will need to have a high credit score to qualify.
6. Cashback Mortgages are Loans That Need to Be Paid Back
It’s important to understand that getting a cashback mortgage is a loan on top of your mortgage. The interest rate is based on the notion that by the end of your mortgage term, you will have paid back the loan to your lender.
In many cases, the amount you pay back to your lender might be twice the amount from the initial cashback. For example, if the lump sum you received was $25,000, then you will end up paying back $50,000 or more to your lender.
7. Cashback Mortgages Come with at Least 5-Year Terms
Mortgages with cashback in Canada have an average of a 5-year term. You should expect to commit to this 5-year term because if you choose to sell your house and move, some lenders will require that you pay back the full amount of the money you received, while other lenders will require that you pay back a portion of the loan.
For example, if you break the 5-year term at 3 years, you might be obligated to pay back the remainder of the 2 years of the term or 40% of the cashback. If you received $25,000 cashback from a $500,000 mortgage on a 5-year term, if you sell your house after 3 years, you would be obligated to pay back the $25,000 or 40% of $25,000, which amounts to $10,000. At that point, you must pay back that $10,000 to the lender for the next 2 years.
8. Cashback Mortgages Have High Interest Rates
One of the most important things to understand about cashback mortgages is that they have higher interest rates than conventional mortgages. If you decide to go with a cashback mortgage, then be prepared to pay high interest over the 5-year term. The interest rate will most likely cost you twice the amount of the lump sum of cashback you received.
9. Cashback Mortgages Do Not Have Variable Rates
If you were hoping to receive a cashback mortgage with a variable rate, this is usually not the case. Usually, cashback mortgages are not designed with variable rates, but with higher interest rates. The benefit of variable-rate mortgages is that the prime interest rate usually decreases in the future. In the long run, variable-rate mortgages can save you money. With a cashback mortgage, you don’t have the option of a fluctuating rate and will have to pay the higher interest rate throughout the full term.
10. You Need to Have Excellent Credit and Stable Income
Since cashback mortgages are considered to be high interest loans, you should have excellent credit. Additionally, you should be able to provide proof of long-term employment, steady income, and not have filed for bankruptcy in the past. What lenders need to see is that you have built a healthy credit rating and have not defaulted on past bank loans.
Contact Us Today!
Taking on a cashback mortgage might be attractive to you, especially, if you need the lump sum of money to pay off high interest debt or make renovations to your newly purchased home. However, they come with high interest rates and if you decide to sell your house before the 5-year term is over, you’ll be stuck paying back the loan and penalty fees until the term is over.
If you have a stellar credit rating and steady income, and want to apply for a cashback mortgage, our mortgage specialists are here to assist you. Many banks do not offer cashback mortgages, but here at Mortgages Mortgages, we can help you prepare for qualifying for one.
To learn more about mortgages with cashback in Canada, call Mortgages Mortgages at 866-417-8805 or contact us here.