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A cashback mortgage can be a good option for those looking to buy a property and know that they will stay in it for a long time, usually five years.
In a cashback mortgage, the borrower is offered a percentage of the mortgage value back, in cash, at the time of closing, which could help reduce your out-of-pocket costs when buying a house. You can use the money for any purpose, house renovation, vacation or savings.
A cashback mortgage is a type of mortgage with the added feature of receiving a lump sum payment of up to 7% of the mortgage amount when the mortgage is finalized. This money can cover your closing costs, renovation expenses, home furnishing, and more.
The mortgage comes with a cash incentive for taking out the loan. The amount of cash you get depends on your mortgage’s size. This money can cover your closing costs or pay off your debts.
The cash incentive comes with a higher mortgage rate than a standard mortgage loan. Below, we cover everything you need to know to decide whether a cashback mortgage is right for you.
Let’s say you are purchasing a $400,000 house and putting $40,000 down (10%).
You have opted for a cashback mortgage option which allows you to receive a 1% cashback for a 5-year term for a 3.5% fixed rate.
Example Parameters:
Step 1: Calculate the mortgage amount
$400,000 (home price)
– $40,000 (down payment)
= Mortgage amount: $360,000
Step 2: Calculate cashback value
$360,000 (mortgage amount)
x 1.0% (cashback percentage)
= cashback amount: $3,600.00
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Some of the best Canadian lenders offering cashback mortgage loans include.
LENDER | CASHBACK REBATE | AVAILABLE TERMS |
Scotiabank | 1% to 5% | 3-Year, 4-Year, 5-Year, 7-Year, 10-Year Fixed. |
ATB Financial | 1% to 4% | 5-Year and 7-Year Fixed |
First National | 5% | 5-Year Fixed |
TD Bank | 4% | 5-Year Fixed |
CIBC | 1% to 5% | 3-Year, 4-Year, 5-Year, 7-Year, 10-Year Fixed. |
RBC Royal Bank | 15 to 10% | 1-Year to 10-Year Fixed |
PC Financial | 1% to 5% | 5-Year, 7-Year, 10-Year Fixed |
Laurentian Bank | 1% to 5% | 5-Year Fixed |
Several lenders are offering a cashback option for their mortgage loans. But you have to qualify to get a cashback mortgage. At a minimum, you need to have:
approvU makes it easy to see and compare cashback mortgages, so you know the total cost of the mortgage loan. With the ability to compare different cashback mortgage options, you can select a low-rate and low-cost mortgage.
Overall, to qualify for a cashback mortgage, you need the following;
While cashback mortgage choices can prove valuable for many homebuyers, especially first-time homebuyers, it comes at an extra cost.
Continuing with the above example, the 5 years term mortgage is offered at a 3.5% rate with a 1% cashback. The standard mortgage option (no cashback) for a 5-year fixed rate is 3.15%.
Example Parameters:
Interest costs for the 5-year term for
cashback mortgage = $58,450.29
Standard Mortgage (No cashback) = $52,480.93
Step 1 : Calculate extra interest paid on cashback mortgage vs standard mortgage
$58,450.29 (interest on cashback mortgage)
– $$52,480.93(interest on standard mortgage)
= Extra interest paid: $5,9969.36
Step 2 : Subtract the cashback value from the extra interest paid
$5,969.36(extra interest paid)
– $3,600 (cashback value)
= Additional interest paid on cashback mortgage: $2,369.36
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It’s important to remember that this is a loan, and rushing to take it without a good reason can be disastrous.
The cash rebate under this mortgage model is usually tax-free, and there is no restriction on what you can use the money for.
Therefore, the idea of a cashback mortgage will always make sense if you need money to:
Cashback mortgages are likable for several benefits that they bring to clients. However, that is not to say that you should jump into them without a second thought. There are also some disadvantages, hence a cautious approach to it. Below are some of the drawbacks of a cashback mortgage loan.
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