Lately we’ve been getting questions in regard to the difference between a cashback, and a cash bonus mortgage. We wanted to address those questions, and give you details so that you can make an informed and educated decision on what choice is right for you.
First, let’s dive into what is a cashback mortgage.
With a cashback mortgage your lender advances you a cash lump sum. When your mortgage closes, the most common sum you receive is 5% of your mortgage amount, but it’s possible to get between 1% and 7% depending on your lender. This is tied into your mortgage amount and is not separate.
For example, someone purchasing a $350,000 home and putting $70,000 down (20%), they’ve opted for a five-year fixed mortgage rate of 2.45%, offering 1% cashback. That would give them a cashback amount of $2,800. This is included in their total mortgage amount borrowed, but the cash is accessible right away. Sounds great doesn’t it? Sometimes this product can help with qualification, and strategically might be the right decision for the client. However, other times, it is important to keep in mind that cashback mortgages may come with clauses that are typically not very favorable for the borrowers.
For instance, we recently had a client who was in a cashback mortgage, who wanted to break their mortgage before the term was up (this is very common! 6 out of 10 people will break their mortgage before the term). In this particular case, the borrower had to pay back all the money that the cashback mortgage had given them, and the penalty was actually higher than normal, due to the cashback mortgage incentive. It was the regular penalty to break their mortgage (click here to find out how a mortgage penalty is calculated) plus an admin fee of 0.75% of the total mortgage amount! That adds up quickly and the penalty to break can increase by thousands of dollars due to the admin fee associated with the cashback mortgage product.
Now, what about a Cash Bonus Mortgage?
A cash bonus mortgage is an incentive that the lender offers once the mortgage is funded. There’s a maximum amount that can be given and it’s not included in the mortgage amount. There are no strings attached; it’s simply money that is given to you once the mortgage funds. There are no penalties associated with it and you would not have to pay back the cash bonus at any time. It’s a great way to capitalize on working with a specific lender and your broker can help you compare incentives of each lender to help you make the decision that is right for you.
Sometimes these words can be interchangeable from lender to lender, so it is important to know the type of cash bonus or cashback mortgage you’re entering into and understand how that might impact you in the short and long term.
If you have any questions about a cashback or a cash bonus mortgage or a curious about what that would mean for you, please give us a call. We’re happy to help you find the mortgage product that is best suited to you!