The truth about the cash back mortgage

Mortgage minute is a regular column by Barb Ten Bos

We often see ads from the major lenders offering cash back incentives on their mortgage products.

Gone are the days where a cash back mortgage could be used to facilitate a purchase without the required minimum of a five per cent down payment. Cash back incentives are now made available for other enticing uses; new furniture and appliances, renovations and the other great hook: Apply the cash back portion directly on your mortgage for a better effective rate.

Just a few weeks ago, I was emailed an offer from a major lender who shall remain unnamed;

“NEW PROMO … Cash back for purchases. Effective five year Rate as low as 2.62%….”

First off, the cash back mortgages are offered at a premium (higher) compared to other standard rates available. The ploy suggested by the lender here is pay it straight down on principle and lower your effective interest rate over time.

Read the fine print

The kicker here and warning to all….there is a catch. If you are to break the mortgage midterm, whether to sell your home or refinance, you not only have to pay the interest penalty, you also have to return the cash back portion to the bank. Even if you used it to pay down your mortgage. This is in the fine print on the websites and in your contract for you to see.

I have seen this happen to a few people that I know and it ended up being a $10,000 to $20,000 factor in their decision not to move or change careers.

There are other more cost-effective ways to obtain financing in better programs such as purchase plus improvements, or home equity lines of credit (HELOC), that expose you to less future risk and still provide you with flexibility to accomplish your goals.