Imagine you’ve found your dream home and secured a mortgage, but there’s one hitch – you have little to no funds left for essential purchases like furniture or home improvement projects.
This is where a cash-back mortgage can become very helpful. This financial product is ideal for home buyers who may have been able to qualify for a conventional mortgage to finance their homes but don’t necessarily have any money left over to pay for furniture or remodelling projects. Cash-back mortgages are becoming increasingly popular among borrowers as they have become a helpful bonus when you get a home loan. Imagine the bank giving you some money back after you borrow to buy a house. It’s a way to earn extra cash for things like buying furniture or fixing your new home. So, you get a mortgage to buy your house and some extra money for your additional housing expenses. It’s a deal that can be handy, especially if you’re short on cash.
What is a cash-back mortgage?
A cash-back mortgage is a type of home loan that offers you a lump sum amount when you take out your mortgage. This cash-back is typically a percentage of your mortgage amount. It can be used for whatever you like, such as covering your moving expenses, making home improvements, or even as a financial cushion. It’s a straightforward way for lenders to give you extra financial flexibility as you embark on your homeownership journey.
How does a cash-back mortgage work?
Imagine buying a home worth $400,000, and you have the means to make a 15% down payment, totalling $60,000. This down payment is money you pay upfront to reduce the mortgage amount. Now, with a down payment of $60,000, you’ll need to borrow $340,000 through a mortgage to cover the remaining cost of the house. Here’s where the cash-back feature comes into play. If your selected lender offers a 3% cash-back incentive, you’ll receive 3% of the total mortgage amount as a cash-back bonus. In this case, that would be $10,200. This $10,200 is given to you when you finalize the mortgage agreement.
This cash-back amount is typically added to the mortgage principal, which means it becomes part of the total amount you need to repay over the life of the loan. Remember that cash-back mortgages often come with slightly higher interest rates than traditional ones, which is how lenders recover the upfront cash they provide borrowers.
Drawbacks of a Cash-Back Mortgage:
- Higher Interest Rates: Cash-back mortgages typically come with slightly higher fixed interest rates than traditional mortgages, which can result in higher borrowing costs.
- Increased Debt: The cash-back amount is added to your mortgage principal, increasing the total amount you owe. This can lead to a more extended repayment period and higher interest expenses.
- Potential for Costly Penalties: If you break your mortgage contract early, you may be required to repay a portion or all of the cash-back amount, which can result in significant penalties.
- Limited Lender Options: Not all lenders offer cash-back mortgages, limiting your choice of mortgage providers and potentially leading to less competitive terms.
- Impact on Equity: The upfront cash received from a cash-back mortgage can slow down the growth of your home equity, as it reduces the initial equity you build through your down payment.
- Less Flexibility: While the extra cash can be helpful, it’s essential to use it wisely. Mismanagement of the cash-back funds may lead to financial challenges or missed opportunities.
- Potential for Higher Closing Costs: Some lenders may compensate for the cash-back offer by charging higher closing costs or fees elsewhere in the mortgage agreement.
It’s essential to carefully weigh these drawbacks against the benefits of a cash-back mortgage to determine if it’s the right choice for your specific financial situation and goals.
Who provides cash-back mortgages in Canada?
The following financial institutions offer cash-back mortgages: RBC, CIBC, Scotiabank, TD Bank, TC Financial, ATB Financial, First National, First Line Mortgages, Laurentian, National Bank of Canada, Resmor Trust Company, Meridian, and CMLS. Typically, these providers offer a cash-back feature with varying percentages within the 1% to 7% range. This cash-back feature allows borrowers to receive a certain percentage of their mortgage amount as a lump sum, which can be used for various purposes, such as covering closing costs, home renovations, or other financial needs. It’s important for potential borrowers to carefully review the terms and conditions of these cash-back mortgages to understand how they work and whether they align with their financial goals.
The Bottom Line
Delving into the world of cash-back mortgages reveals a financial tool that goes beyond the basics of traditional home financing. It’s not just about securing a roof over your head; it’s about having the financial flexibility to make that house feel like home. By understanding the fundamentals of cash-back mortgages and considering their advantages and potential drawbacks, you can embark on your homeownership journey confidently and clearly. Remember, the key lies in making informed decisions that align with your unique financial goals and aspirations. Whether you’re eyeing a cozy starter home or your forever dream residence, grasp the basics and explore the possibilities a cash-back mortgage can offer. It is the extra boost you need to turn your new house into your ideal home.
