Everything You Should Know About Cash Back Mortgages In Canada

We’re all fully aware of the crisis in the world housing market, especially in the United States, it’s practically impossible to have missed it with all of the coverage on the news.   Unfortunately, this situation has affected Canadians as well.   It’s more difficult than ever for a person with no down payment to get a mortgage in Canada.   With the cancellation of the zero down mortgage programs, many people now believe that if they don’t have 5% down payment to buy a house they won’t be approved for a mortgage. Although it’s a little more stringent, it’s still possible to get zero down mortgages, however it’s in the form of what the banks call cash back mortgages. Cash back mortgages are a great alternative for someone who wants to take advantage of the low price of housing in Canada right now but doesn’t have 5% down payment to purchase a home.   Alternatively, some people have saved for their down payment but don’t quite have enough.   A cash back mortgage would be a good option for this situation as well.   You’re probably wondering what’s the difference between a cash back mortgage and the zero down mortgage programs?  The banks would like you to believe that there is essentially no difference between these two mortgage products, but that is not the case. Although cash back mortgages are a fantastic alternative to the zero down mortgage products, there are significant differences. The first and most important difference is the interest rate.   When the banks were offering zero down mortgages the interest rates were the exact same as if you had 5% down, with a cash back mortgage, the interest rates are usually about 1% higher than a traditional mortgage product.   However, this is offset by the fact that the bank is giving you your down payment.   That means if you have a cash back mortgage for $100,000 the bank will give you 5% down, and you only have to pay back $95,000. Banks would like you to believe that they are giving you the 5% out of the goodness of their hearts, but the fact is the interest rate is higher on this product so they can recoup that 5%. The good news is, at the end of your 5-year term with that bank, you are free to shop around again for the best rates.  The second difference between cash back mortgages and the zero down mortgage programs is the penalty if you break the mortgage before the 5-year term is up.   On a traditional mortgage at 100% financing, if you break the mortgage the penalty is the same as any other mortgage, the standard 3-month interest penalty would apply.   With a cash back mortgage they also charge a 3-month interest penalty, in addition to that you have to pay back a portion of the cash the bank “gave” you. I know it seems like I am trying to deter you from a cash back mortgage but that isn’t the case, I just think it is important to enter into cash back mortgages fully aware of the product.   It is important to weigh your options carefully.   If you decide to wait and save up a down payment for your house because you don’t want to pay a higher interest rate, one very important point to consider is. Every year on average houses increase in value by approximately 5%, so,  if you were to purchase a house for $100 000 today that same house would cost you $110 000 in two years.   If you consider waiting because the interest rate seems a little high you should know that a cash back works out to about a quarter of a percent higher than a traditional mortgage, when you consider that you are not paying back the cash back portion.   On a $100 000 mortgage over five years you will pay approximately $4,800 more in a cash back mortgage than if the zero down mortgage program was still available.   However, if you consider that waiting two years to save would cost you $10 000, the cash back mortgage would cost less than waiting and would be an excellent option to get into the housing market.   Cash back mortgages are excellent options for homebuyers, but you should make certain that you are fully aware of the conditions in your mortgage.  

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She will also provide information to anyone interested in learning about the Cash Back Mortgages.