Cash back mortgages

So you have probably seen a local bank advertise a cash back mortgage.

It sounds awesome. There are always expenses you need to cover and this could be the solution for you. Cash back mortgages allow borrowers to receive money back after the closing of a mortgage. But as always, we should take a closer look so that you are fully informed.

What is a cash back mortgage?

Well to put it simply, you get the money you need to pay the seller for the home and then you get a pre-determined amount of cash that becomes yours to do with as you please. Legal fees, new furniture, debt payout, landscaping, or other home renovations are all great examples of just this. The funds could also be used to invest in your RRSP or your child’s education fund.

The one thing you can no longer use this money for is the down payment. The government stepped in a couple of years ago and made regulatory changes so that you must have the down payment from one of the other acceptable sources.

How much money does a cash back mortgage provide?

Cash back mortgages will provide you with up to 5% of the mortgage loan amount. This means that the larger your mortgage is, the more money you can receive from a cash back mortgage.

For example, if your mortgage is for $100,000, you can receive up to $5,000 back.

What are the benefits of a cash back mortgage?

Buying a home can become very expensive. Having the extra cash on hand which you have borrowed at today’s low interest rates could be just the thing you are looking for.

What are the things to watch out for?

Cash back mortgages come with a higher interest rate. The lenders charge a rate premium for this product which can be as much as 1% higher than the best rates available on the market. That means your monthly payment will be higher. You must also keep in mind that if you break the mortgage contract during the term, this money becomes payable in full in addition to any penalty the lender assesses. That can really add up so your first step should always be a call to your lender to determine just how much this will be.

You should also know that these mortgages require you to have fairly strong credit as there is a higher risk to the lender given that they are now lending you even more money.

How does it work?

These mortgages are available whether you are purchasing or refinancing. You can have as little as 5% down or as much as you want. You can choose a five, six, seven or 10-year term and you still have the ability to determine your amortization.

You can also choose your payment frequency be it monthly, biweekly or any other. The lenders still allow you prepayment privileges so, depending on your lender, you can pre-pay up to 20%. The funds will be given to the lawyer on the day the mortgage closes who will then give the funds to you.

So that’s about all I have to say about that but as always ask questions of your qualified mortgage professional to help you decide the best course to achieve your goals.

Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.

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