Let’s face it: buying a house is an extremely expensive financial investment and will probably be the most important investment of your life. But if the house itself is the most expensive part of the transaction, there is a host of other expenses related to the purchase of real estate. Think of all the furniture you need to equip your new home or any update or renovation needed to make the house live up to your expectations. These can translate into tens of thousands of dollars or more. You have already taken out a mortgage to finance your home, but perhaps this may not be enough to cover all other expenses related to home ownership. In addition, making a large down payment is another challenge many Canadians face when buying a home.
This is where a mortgage repayment can become very useful. This financial product is ideal for homebuyers who may have been eligible for a conventional mortgage to finance their home, but do not necessarily have the money to pay for furniture or renovation projects. Fortunately, there are many Canadian lenders that offer cash back mortgages when you take out a home loan. Cash back mortgages are becoming increasingly popular among borrowers, especially those who can only make small investments.
How does a repayment mortgage work?
With a Cash Back Mortgage, the lender will advance you a lump sum cash upon closing of your mortgage. A certain percentage of the value of the property will be allowed to be refunded at the end. The most often awarded amount is 5% of the mortgage, although some lenders are more flexible in their offers and offer between 1% and 7% cash back. For example, if you borrow $ 300,000 to finance your home with a 5% cash back, your lender will provide you with an additional $ 15,000 (5% of $ 300,000). This means that you would get a total mortgage loan of $ 315,000. Money can be used as you please, but it is truly designed to help buyers who are having trouble getting a 5% down payment (the minimum down payment required to buy a home with a conventional mortgage).
It should be noted that only the initial amount of $ 300,000 would be recorded as a mortgage.
Eligible for a Cash Back Mortgage
Before granting you a mortgage repayment, your lender will want to make sure you qualify for such a program. In general, you will first need to meet the following criteria:
- Pay by the hour or pay (self-employed people are generally not eligible)
- Have a credit rating of at least 650
- Apply for a mortgage payment as a homeowner (no tenant should occupy the premises in question)
What are the disadvantages of a repayment mortgage?
As useful as a mortgage repayment may be, borrowers should be aware of the potential disadvantages of such a financial product before accepting such a loan.
Higher interest rate – The main disadvantage of taking out a cashback mortgage is that you get a mortgage at the posted rates rather than the discounted rate, which could result in a much higher amount interest paid over the life of the loan. It is the added interest that pays for the money that your lender is able to give you. The posted rate will probably cost you almost twice the value of the Cash Back Amount.
Variable Rates Unavailable – If you were considering paying off your variable rate mortgage, you would not be lucky. Cashback mortgages are not available at variable rates. Many borrowers like the idea of a variable rate mortgage when we think that rates will go down in the near future. If your budget can handle fluctuations in interest rates and, therefore, fluctuations in mortgage payments, floating rate mortgages can save you money. In fact, it has been shown that variable-rate mortgages can save a lot of interest when they are contracted at the right time. Unfortunately, you do not have this option with a mortgage with repayment
Recovery Penalty Fee – Not only will you be required to pay a higher interest rate, but you may also be required to “recover” the original lump sum cash payment that was paid to you by your prorated lender. This would happen if you ever sell your home in the future, pay off the mortgage and do not use it to buy a new home. As an illustration, suppose you have recovered your $ 15,000 repayment on your $ 300,000 mortgage for a five-year term. After three years, you sell the house and pay your mortgage with the proceeds of the sale. At that time, you would be required to repay the $ 15,000 to the lender for the remaining two years of the five-year period
Not available for subprime borrowers – For a lender to approve you for a repayable mortgage, you must have stellar credit. The majority of lenders will only issue repayable mortgages for borrowers with good credit ratings. You will also need to have a solid credit profile and a stable and adequate income that can be easily proven. Mortgages with a high ratio may also require an even higher credit rating to be approved.
If you’ve done everything you can to earn the last penny to save for a down payment but you’re running out of money, a mortgage with a refund may be a viable option, especially if there is absolutely no money in the pot to cover the cost of site development or necessary improvements. That said, you should also be wary of cashback mortgages before applying, as the cost can often overshadow all the financial benefits they can afford. Talk to your mortgage specialist to find out what’s best for you.