Cash back mortgages are starting to become more commonly advertised, particularly amongst the big banks. Usually these are where you see an ‘effective rate’ being advertised – where they are factoring in the cash-back into their advertised rate. So what exactly is the catch with these?
Well, firstly, the actual rate you’re going to get on the mortgage will be at a premium to whatever rates are available. This is important to know – so that you can factor in the higher monthly mortgage payments you’re going to have – but also it has other impacts, such as penalty charge calculations.
Secondly, if you break these mortgages before the end of the term there is going to be massive issues. This is the most important part you need to be aware of. Some studies show that around 60% of Canadians break a 5 year term before the end – whether to move home, refinance, lower their rate or consolidate debts – there are a variety of reasons (sometimes unforseen). When this happens, not only will you have to pay your penalty but you will have to return the cash back you got. If you used it to pay down your mortgage, which seems like a smart move, you might not be able to get it back out again.
PEOPLE FINDING THIS OUT THE HARD WAY
At Dominion Lending Centres, we have had clients that have ended up getting stuck with $10,000-20,000 bills because of this. In fact, it has led to them being stuck in a job and unable to move careers because of this!
So, while cash back mortgages might seem great at first (and for some people they will be a good decision), you should consider that there are other ways to lower your ‘effective rate’ that might not come back to bite you as bad in future.
This is where getting professional mortgage advice could be the difference between a great mortgage and a decision that comes back to bite you in the future.