By Riki Unrau

You have seen them advertised on television or online. “Get five per cent cash back on your mortgage!” But is that really all there is to them?

Very rarely in life is a business going to offer something for nothing. Especially when there is money to be made. Cash back mortgages are no exception. So let’s break down exactly how they work so that you can decide if one is right for you.

Some lenders will offer up to five per cent cash back on your mortgage approval. This means that you will be given a certain percentage of the value of the property upon closing. This money can be used towards closing costs, paying off debt, buying new furniture or taking that trip to Hawaii you have always wanted.

But while it may seem like the bank is just going to hand you all of this cash as thanks for your business it is not quite the case. In order to take advantage of these programs you are going to have to accept a higher interest rate on your mortgage term. Because of this higher rate you will end up paying more in interest over the length of the term. Often this is more money than you receive in the cash back.

Let’s do an example because we all love math:

You want to purchase a property for $250,000 adding in a five per cent cash back option. This will give you $12,500 in your pocket upon closing.

Using today’s rates, this will make your monthly payment $1,403 and you will pay $54,188 in interest alone over a five-year term.

If you decided against the cash back and went with the standard five-year rate your monthly payment would be $1,131 and the interest paid over the term drops way down to $29,846.

Add in the extra cost of the higher mortgage payment, which is an additional $16,320 over the term, and you are paying a total of $40,662 over five years for that $12,500.

Another downside arises in claw back privileges.

Should you choose to sell the property, payoff and not replace the mortgage against a new property being purchased, then the original cash back would be have to be paid back at the prorated amount. To keep it simple, say you were given $5,000 cash back at the beginning of a five-year term. After two years you decide to sell your home and move to Mexico. Not so fast! You owe the bank $3,000 according to the claw back privilege. However, if you take your mortgage to a new property you will not have to pay anything back.

This is not to say that a cash back mortgage is wrong for everyone. We all find ourselves in situations where the cash on hand is worth more than what we will eventually pay for it. It is a personal decision that should be considered at great length. There are no right or wrong answers here but always make sure that you fully understand all of the options being presented to you before you sign on the dotted line.

If you would like to know more about a cash back mortgage and how it could be beneficial to you please contact your friendly, neighbourhood mortgage broker.

– Riki Unrau is a Mortgage Broker with Invis Williams and Associates, located at 828C Baker Street, Cranbrook, BC V1C 1A2 – 250-919-6402. For more try: rikiunrau.com

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