Cash-Back Mortgages – Gold or Garbage?
Cash-back mortgages have been around for a while and can seem like an attractive option for many homeowners. For the cost of a higher interest rate, lenders will ‘give’ the borrowers a certain percentage amount of their mortgage back in cash.
Lenders love to promote this as a great opportunity for borrowers to ‘use the cash-back to pay for closing costs, take a dream vacation, pay for a wedding or purchase a new car’. Whether this is an intelligent decision or not requires doing the math and figuring out if the expense of the higher interest rate is more or less than the cashback offered.
That being said, who wouldn’t want, say, 3% of their mortgage amount in cash to spend as they see fit, without incurring any extra debt? It sounds great, but you know the saying…
If it sounds too good to be true….
Nevertheless, you can’t answer life’s most vexing questions with colloquialisms. So, before we come to ANY conclusions, good, bad or otherwise, let’s have a detailed look at the market offerings out there.
The following table lists all the major lenders in Canada that offer Cash-Back mortgages.
We’re going to pretend we’re looking for a cash-back mortgage of $450,000 with a 5-year term, 25-year amortization and monthly payments.
| Lender: | % Cash-Back Offered | Cash-Back Mortgage Interest Rate | Non Cash-Back Mortgage Best Rate | Cash-Bank Amount | Additional Interest Cost (Over the 5 year term of the cash-back mortgage) | Percentage of Cash-Back Amount Paid back to Lender through additional interest cost. |
|---|---|---|---|---|---|---|
| First National | 5% | 4.64% | 2.79% | $20,000* | $39,583.92 | 198% |
| RMG | 1% | 3.14% | 2.69% | $4500 | $9549.97 | 212% |
| 1.5% | 3.19% | 2.69% | $6750 | $10,614.09 | 157% | |
| 2% | 3.44% | 2.69% | $9000 | $15,943.34 | 177% | |
| 3% | 3.74% | 2.69% | $13,500 | $22,356.46 | 165% | |
| RBC | 4% | $18,000 | ||||
| 5% | $20,000* | |||||
| 7% | $20,000* | |||||
| CIBC | 2% | Prime – 0.3% (2.4%) | Prime – 0.5% (2.2%) | $9000 | $4212.34 | 47% |
| 5% | 3.79% | 2.79% | $22,500 | $21,309.42 | 94% | |
| TD | 5% | 4.64% | 2.89% | $22,500 | $39,335.08 | 175% |
| National Bank | 4% | 4.74% | 2.69% | $18,000 | $43,859.93 | 244% |
* These Cash-Back amounts are capped by the lender at the amount shown.
** Readers should know that this is a snapshot of current rates and products – all of which are subject to change at anytime, so this article may not be super relevant/accurate after a few months.
*** At the time of writing, 2 days after initially speaking with the RBC Mobile Mortgage Specialist, she hadn’t gotten back to me with rate information. (No surprise there)
The numbers never lie and in this case the numbers are very compelling.
At worst, National Bank’s 4% cash-back offer will yield a borrower $18,000 in up-front cash. This cash however, comes with a price tag of $43,859 in additional interest costs over the 5-year term of the mortgage. In simple terms, the higher cost of interest means that you are paying back 244% of your original cash-back amount. Scary right? Terrible deal for the borrower, great deal for the bank.
At best, CIBC’s 2% cash-back offer will yield $9000 in cash. This cash however, only costs the borrower $4212.34. What does this mean? Well believe it or not, CIBC is actually giving away free money – to the tune of $4787.66 in this case. This means that you are only paying back 47% of your cash-back funds – the remaining 53% is actually free money. And tax free at that!
The one caution here is that, CIBC cash-back mortgages have very limited pre-payment privileges (10%per year), and if you have to end the mortgage before the entire term is up, you have to pay back the entire cash-back amount, in addition to standard mortgage penalties.
In the middle of the pack is everybody else – RMG, First National and TD. Their offerings are not nearly as cruel and unusual as National Banks, but still not even close to being borrower friendly. They come with additional interest costs ranging from 157% to 212% of the original cash-back amount.
The RBC mobile mortgage specialist I spoke to, 2 days prior to writing this article hadn’t gotten back to me yet with rate information. Not surprising service there from RBC.
Conclusion:
Gold and Garbage.
If you want to use a cash-back mortgage to take a dream vacation, pay for your wedding or purchase a new car, you can be sure that there will be a lineup of lenders looking to take advantage of you. If you are smart and prudent however, you should be able to weed out the bad deals from the good.
If you’re not confident on how to tell the difference between products, or at the very least want a second opinion, this is when you will call a mortgage broker who is willing to give you the straight goods.
Happy mortgage hunting.
Mike Grace is an independent full-time mortgage planner and industry insider located in Victoria, BC. If you are purchasing, refinancing or renewing your mortgage, contact Mike to obtain the best available rates and terms.