Everything You Wanted to Know About Cashback Mortgages
Are you considering signing up for a cashback mortgage? You’ve come to the right place. In this article, we’ll look at what is a cashback mortgage, why choose one and when a cashback mortgage may or may not make sense.
What is a Cashback Mortgage?
A cashback mortgage is a mortgage that gives you funds or cashback, as the name implies when you take it out. When you take out a cashback mortgage, your mortgage lender will advance you a cash lump sum when your cashback mortgage is closed.
The cashback you receive is often always expressed as a percentage of the mortgage amount. Most commonly, lenders off 5% of the mortgage amount as cashback; however, individual lenders can choose whatever cashback amount they want. Most commonly, you’ll see cashback of between 1% and 7% of the mortgage amount.
Why Choose a Cashback Mortgage?
Cashback mortgages can make sense when you’re buying a home and need some extra savings. Unlike a bonus at work, the funds you receive via a cashback mortgage are tax-free. You can use the cash back as you see fit. Some common uses include closing costs (real estate lawyer fees, land transfer tax, etc.), emergency savings, home renovation, and paying down or paying off debt.
When applying for a mortgage, there are debt ratios you must meet to qualify. However, if you have some extra debt, it could cause you not to qualify. The simplest option is to pay it down, but that’s not an option if you don’t have the funds. The simple solution is a cashback mortgage.
With a cash-back mortgage, you can use the funds to pay off or pay down your debts to bring your debt ratios in line and be able to close on the property.
Closing costs are another big one. If you’re hoping to maximize your home purchase price, you may decide to put every penny towards your down payment, leaving you with very little to put towards closing costs. Again, the simple solution is a cashback mortgage.
With a cash-back mortgage, you could use the funds to cover your land transfer tax and real estate lawyer fees.
Something important to note is that you can’t use the cash from a cashback mortgage towards is the deposit or down payment of the home you’re buying. If that was your plan, you better come up with a new plan, such as asking parents for gifted down payment funds.
When a Cashback Mortgage Might Not Make Sense
Cashback mortgages can be great, but similar to all things personal finance, there’s a cost to them. Lenders aren’t just giving you cash back out of the goodness of their hearts.
In exchange for the cashback, you’re almost always paying a higher mortgage rate over the life of your mortgage. It’s through that way the lender recoups the cashback.
If you can afford a home with a traditional mortgage, you’re almost always better off taking it. However, if the cashback is the difference between you buying and not buying a home, it may very well be worth it.
The Bottom Line
Are you not sure whether a cashback mortgage is worth it for you? Let our mortgage experts do the math and help you decide whether it makes sense. Reach out to us today.