CASH BACK MORTGAGE, IS IT REALLY WORTH IT?

Recently, I have been hearing a lot of people being offered a Cash Back Mortgage by their agents or by Bank Representatives.  Worse, they are being presented as if it is a free money.  Banks DO NOT GIVE FREE money.  Furthermore, this product 's pros and cons are not properly explained. 

But let us go back to the basic.  If you do not have money saved up as down payment and you have a lot debts in place and you opted to go for Cash Back Mortgage, you just placed yourself in a Financial Suicide.  Below is a link the article of Financial Post dated April 20, 2014.  This article maybe dated but the facts about Cash Back Mortgage stays the same. 

To read the Financial Post Article , click here.

Now, if you read the entire article, let us apply it to the current  Cash Back Mortgage being offered by CIBC.  For example, and I am not saying this is the actual rate, you are buying a house for $400,000 and CIBC gives you a cash back of 5% ($20,000) at 3.49% 5 year fixed rate compare to possible 2.44% rate you could get if you are not doing a cash back.

With Cash Back:                                                                                   Without Cash back:

Monthly Payment=$1994.97                                                                Monthly Payment=$1,690.94

Interest Paid after 5 years=$64,754.97                                              Interest Paid after 5 years=$42,690.97

Based on the above estimates and example, you are paying $304.03 more on monthly payment and at the end of 5 years, you would be paying $22,064 more interest if you go for a Cash Back Mortgage. Please note, the computation above does include Mortgage Default Insurance premium which is applicable if your down payment is less than 20%. So if you are getting an Insured Mortgage, you could be paying more.

In addition, if you pay off, transfer or refinance your Cash Back Mortgage before your term is up, you would need to pay back if not in full, a portion of your cash back.  Which basically leaves you trapped by your Bank.  Now, let us go ahead and use CIBC's Mortgage Prepayment calculator by going to https://www.cibc.com/ca/mortgages/calculator/mortgage-prepayment-calculator.html .

Assuming, you did get the Cash back Mortgage in 2016 with Maturity of June 1, 2021. And for example purposes, We will use current rate offer of 3.49% 5 year fixed ,Cash Back of 5%, and the Principal Balance after 1 year is $390,000 and current posted rate of 4.79% for 5 year fixed.  Your rate discount is the difference between posted rated of 4.79% and rate special offer of 3.49% (1.3%) .  So, this is what you should come up with:

Prepayment Charge of $11, 291.36

Cash Back Repayment of $20,000

Prepayment charge including cash back $31,291.36

That is a HUGE penalty!

Now, is Cash back Mortgage bad?  No.  Is it for everybody? No.  Cash back can be beneficial to a specific situation.  That is where Professional Agents or bank Representatives come into play.  They should be able to explain to you the Pros and Cons and not just sell you a product.  So always make sure to talk to you licensed Mortgage Professional.