Originally popular in the busy spring market only, cash back mortgages have become a mainstay available all year long. To the unsuspecting home buyer a cash rebate of 3-5 per cent of the loan value can be awfully tempting. But a closer look at this marketing ploy reveals substantial money forfeited by the home buyer.
If you elect to take the 3 per cent re(bait), you forfeit any discount on the mortgage rate. Having to take the "posted rate" makes doing any comparison real simple. For example, if you take a $100,000 5-year mortgage at today's posted rate, 6.95%, you get a 3 per cent cash back of $3000. Alternatively, you could take the same $100,000 5-year mortgage at the discounted rate, 5.55%, and save apporximately $7,000in after-tax dollars. You decide! Even at the 5% cash back ($5,000) you still save approx. $2,000 in after tax dollars.
Equally important is the size of the mortgage you qualify for. Assuming you don't need the cash back to cover your closing costs, you have a $60,000 household income, $2,000 property taxes, $100 monthly heating costs, no other debts, and a 10 per cent down payment, using the 6.95% posted rate, you would qualify for a $191,000 mortgage. However, if you went with the discounted rate, 5.55%, you would qualify for a $217,000 mortgage. This can make a big difference in the home you choose to buy.
And then there's the claw back associated with most cash back mortgages. That is, if you don't stay put for the duration of your minimum 3 or 5-year term, you must give back the pro-rated amount of the rebate, and in some cases the whole rebate.
So who benefits from the cash back mortgage? If you're like most people, raising a down payment and closing costs is the hardest part to buying a home, and this program was designed to assist you with that. If you already have these costs covered, look elsewhere to find greater value in your mortgage.
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