Finding the ideal property is only one aspect of managing the intricacies of buying a home, another is obtaining the appropriate financing to turn your ideal home into a reality. Here, a cashback mortgage can be your right financing option. Cash-back mortgages have become a popular choice for many potential homeowners. You must understand the benefits, downsides, and mechanics of these financing arrangements before committing to this type of financing.
Before choosing to proceed with this kind of financing, we offer an in-depth analysis of the advantages, disadvantages, and workings of cash-back mortgages in our guide. In addition, we guide you through a variety of different financing options while comparing the advantages and suitability of each. Through an exploration of options such as home equity loans and second mortgages, as well as the utilization of personal loans, credit lines, and retirement savings through the home buyers plan, readers can acquire significant knowledge about diversifying their financing strategies to suit their financial objectives and situation.
Cashback Mortgage: What is it
Borrowers with cashback mortgages have the option of accessing money in addition to their mortgage balance. This additional money is given to you upfront when the mortgage is closed. Lenders typically offer a lump payment that ranges between 1% and 7% of the mortgage value, with 5% being the most common amount. To have money set aside for unforeseen costs after making a purchase, purchasers frequently choose cashback mortgages.
People use cashback mortgages for various purposes, such as buying furniture or paying closing fees, in addition to taking in unforeseen bills. Though the idea can sound appealing, there are several crucial things to keep in mind.
Working of Cashback Mortgage
Under a cashback mortgage, after the purchase or sale of property is completed, your preferred lender deposits a lump sum of cash into your account. The offered cashback varies from 1% to 7% of the total amount of your mortgage. Although 5% is a popular choice among buyers, you are free to choose the amount that best meets your requirements.
It’s crucial to understand that the cash back is determined by your mortgage balance rather than the entire cost of the house. For example, your mortgage amount would be $774,758 if you bought a $800,000 house in Canada with a minimal down payment and CMHC mortgage default insurance. This amount would be the basis for calculating cash back. Choosing a 5% cashback would add $38,738 to the total mortgage amount that would be accountable to interest, $813,496. The available cash back amounts for various mortgage sizes and cash back percentages are broken down below.
| Cash Back % | $100,000 Mortgage | $400,000 Mortgage | $600,000 Mortgage |
| 1% | 1,000 | 4,000 | 6,000 |
| 5% | 5,000 | 20,000 | 30,000 |
| 7% | 7,000 | 28,000 | 42,000 |
You will begin paying back your mortgage as soon as it is finalized and you receive the payback. Your mortgage payment includes the cashback amount, which is repaid over a 25-year amortization period. A part of each mortgage payment you make goes toward the repayment of both your mortgage debt and the cashback loan. The total interest you will pay for the duration of the mortgage term can be estimated with the use of a mortgage interest calculator.
Eligibility for Obtaining a Cashback Mortgage in Canada
Numerous lenders in Canada offer cash-back mortgages, spanning both alternative lending institutions and mainstream banks such as RBC, BMO, Scotiabank, and CIBC.
Securing a cash-back mortgage, however, is not a straightforward process due to the increased risk assumed by the lender. To qualify for such a mortgage in Canada, you must meet specific criteria established by the lender, which typically include:
- Stable employment with a reliable income source, commonly in the form of a salary or hourly wage. Self-employed individuals may encounter challenges in obtaining approval.
- A credit score of at least 650, demonstrating a sound credit history and responsible financial behaviour.
- Intend to utilize the property as your primary place of residence rather than a rental property.
You will have a better chance of getting approved for a cash-back mortgage in Canada if you follow these guidelines.
Cashback Mortgage: Is It a Wise Choice?
In the following situations, a cash-back mortgage could be appropriate:
- Paying Closing Costs: A cash-back mortgage can be useful if you wish to pay for closing costs such as land transfer taxes or attorney’s fees.
- Home Improvements or Repairs: You can use the additional money to pay for major repairs or home improvements if the house you’re buying needs them.
- Outfitting Your New Residence: When you need to buy equipment or furniture, cash-back funds can be useful.
- Cash Flow Support: You may require additional funds in the first few months following your house purchase in order to augment your regular income.
- Educational loans or excessive-interest debt: It may be advantageous to use the cashback amount to settle any outstanding obligations with high-interest rates.
Advantages and Disadvantages of Cashback Mortgage
These financial products include higher interest rates and possible qualifying conditions in exchange for an upfront cash bonus. Don’t forget to carefully consider if a cash-back mortgage fits your unique requirements and financial objectives.
Benefits
- Extra cash: Cash-back mortgages give you additional money that you can use to pay for different costs associated with being a homeowner in addition to the purchase price.
- Consolidated payments: You can streamline your money management by paying only one monthly payment for both your mortgage and your cash-back loan.
- Comparative shopping: Because these mortgages are so readily accessible, you can search for the best deal for your budget by comparing conditions and rates.
Drawbacks:
- Increased interest rates: Interest rates on cash-back mortgages are usually higher than those on conventional mortgages.
- More rigid qualification: Because there is an additional monetary component, fulfilling the eligibility requirements could be more difficult.
- Contractual fines: If you have to breach or amend the terms of your cash-back mortgage, be mindful of the associated penalties.
Exploring Alternatives to Cashback Financing
There are options outside of the cash-back mortgage to think about when figuring out how to increase your cash flow after buying a house. Let’s investigate a few choices:
- Personal Loans: These loans are typically accessible and, if you possess a strong credit score, you could secure a favorable interest rate.
- Home Buyers Plan (Borrowing from Retirement Savings): Understand the Home Buyers Plan, a tool that lets you access your retirement funds. You can use this plan to borrow up to $35,000 to pay for closing costs and other expenses, such as the down payment from your Registered Retirement Savings Plan (RRSP).
- Second Mortgage (Home Equity Loan): Take into account getting a home equity loan or another type of second mortgage. With this option, you can turn the equity in your house into easily accessible cash once you buy the property.
- Credit Cards: If you need to pay for moving expenses or furniture purchases over time, you might think about using a credit card, particularly one with no fees or a low interest rate. But to minimize any potential disruptions from changes in your credit record, you must wait to apply until after your mortgage closes.
- Line of Credit: Explore the possibility of obtaining a line of credit. Unlike a personal loan, a line of credit offers greater flexibility and often comes with more attractive interest rates, making it a versatile financing solution.
Summing Up
In summary, although cash-back mortgages have attractive upfront incentives, there are several factors to take into account, which means they might not be the best option for every buyer. Before making any final decisions regarding house finance, we strongly advise speaking with an experienced financial counselor or a respectable mortgage broker like Dwelling IQ to assess your unique financial situation and goals.
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