Variable rates are expected to stay low until at least 2023, whereas fixed rates are on the rise.
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Your questions about cash back mortgages in Canada, answered.
What is a cash back mortgage?
When you apply for a mortgage, you can ask your bank to provide a loan that’s larger than the value of the property you’re financing.
Not substantially larger, of course. The maximum cash back most lenders will grant is 7% of the mortgage. The most common cash back amount is 5% of the mortgage. A loan of 1% is the minimum you can apply for.
Your cash back is transferred to you at the same time you receive your mortgage (in other words, the money).
Like any loan, the cash is tax-free and can be used for whatever you want. Many homebuyers use it to cover costs that come with buying a property and moving, such as land transfer taxes, legal fees, hiring movers, or even buying furniture.
How does a cash back mortgage work?
Your cash back is a lump sum you receive once your mortgage has been approved. The money is yours as long as you hold the mortgage to the end of its negotiated term.
Where can you get a cash back mortgage in Canada? Most A-lenders provide cash back mortgages. The term A-lender refers to Canada’s big banks. These institutions give preferential treatment to homebuyers that have strong credit scores and stable employment within an organization. Self-employed people, in many instances, can qualify for cash back mortgages from an A-lender if they are able to show an income history of two years or more and are still in business.
It may also be possible to get a cash back mortgage from a private lender, as private mortgages can be structured in any way.
LowestRates.ca can connect you to a broker who can help you find the best rates on cash back mortgages from an A-lender.
What is a cash back mortgage refinance?
Cash back mortgages are typically sought out by people who are in the process of getting a new mortgage to cover moving costs.
But what if you already own a home and aren’t planning on moving soon, but need access to cash? You can still get a cash back mortgage by refinancing your existing mortgage. This is sometimes referred to as a cash-out refinance.
Refinancing your mortgage means that you’re paying off your current one with a new mortgage. To do this, you have to break the contract with your original lender (this is what it means to “break your mortgage”).
With a cash-out refinance, you can get up to 7% of your total mortgage advanced to you as soon as the mortgage closes.
One crucial difference is that you must have equity built up in order to qualify for cash back. Another thing to consider is that refinancing a mortgage can often be quite costly. Remember all those bank and lawyer fees you had to pay the first time around? You’re going to have to pay those again. Plus, refinancing and requesting cash on top of it means you will extend the life of your mortgage, so you’ll be in debt for longer.
Cash-out refinances can help pay for renovations or allow you to consolidate your debts. However, the cash back portion of your mortgage loan will have a higher interest rate than your mortgage. Refinancing also brings with it many fees. Add to that the fact that you are extending your mortgage, applying for a cash back mortgage could result in mounting debt.
You don't necessarily have to do a refinance. Instead of refinancing, you can ask for cash back if you transfer your mortgage to another lender at the end of your mortgage term. A cashback transfer avoids the issue of not having enough equity in your property and you get the money you need. The new lender also covers the appraisal and legal fees in most instances.
Are cash back mortgages a good idea?
There’s no right or wrong answer. Whether a cash back mortgage loan is a good idea for you will depend on your current financial situation and your long-term goals. If you’re thinking about applying for a cash back mortgage, here are some pros and cons you should consider before you start your search for the best cash back mortgage deals.
Pros of cash back mortgages
- A quick way to get cash to cover debts.
- Paying off debt in one go can improve your credit score.
- You don’t have to deal with another lender; you’re doing everything through your bank.
Cons of cash back mortgages
- The interest rate on the cash back advance is different than your mortgage rate. You’ll be borrowing money at a higher interest rate than your mortgage.
- If you break your mortgage before the end of the term, you’ll still need to repay the cash back.
- You can only get cash back on a fixed-rate mortgage; you don’t have the ability to borrow extra money with a variable rate mortgage.
- Homeowners and buyers with subprime credit scores can’t qualify for a cash back mortgage.
Begin an application with LowestRates.ca to speak with a broker or bank about whether a cash back mortgage is the best option for you and your goals.
Can you use a cash back mortgage for down payment?
No. The cash back is released once the mortgage closes. To be approved for a mortgage, you have to have at least a 5% down payment (20% if the property is valued at $1-million or more).
How to find cheap cash back mortgage rates
Your best bet for finding a deal on a cash back mortgage — keeping in mind that interest rates on cash back mortgages tend to be higher than the rate on your mortgage loan — is to do the following:
- Meet the lending qualifications (have a strong credit score and provable income).
- Shop the market under the guidance of a mortgage broker. A broker will be able to show you cash back mortgage offers from multiple lenders.
How to compare cash back mortgage rates
A mortgage broker can help you compare rates on cash back mortgages. A broker’s job is to show clients offers from many different lenders — unlike a dedicated bank agent, who can only advertise offers from their employer. LowestRates.ca’s online platform can’t compare rates on cash back loans. However, we can put you in touch with a mortgage broker who can help you shop the market and find the lowest cash back mortgage rate you qualify for.
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