What is a ‘Cash Back’ mortgage and is it the right fit for you?

Many years ago ‘Cash Back‘ mortgages were a “norm”.

Mortgage rate offered was a touch higher than best rate- and you were presented Cash Back as a percentage of the total mortgage amount.

It was only offered (typically) on purchase transactions.

The Cash Back component had to be paid back (in full) should you break the term early with your current lender. (even if you were only a handful of months away from renewal date)

With ever changing mortgage rules –Cash Back mortgages somewhat disappeared over the years.

A couple chartered banks still have this product- but it is not widely advertised and these lenders still require the entire cash back to be paid in full if the contract is broken.

GREAT NEWS: Cash Back mortgage options are available again and with much more flexible rate and terms!

  • Available for purchase transactions– receive up to 3% cash back
  • Available for renewal transactions– receive up to 3% cash back
  • Amount of cash back to be repaid decreases by 20% per year (if you break your term)

Is Cash Back something you should consider?

  • It’s a great option for FIRST TIME HOME BUYERS
    • The rate is only slightly higher than best rate on the market but may open up a ton of possibilities
    • The 3% cash back CAN be used towards your closing costs (NOT your downpayment)
      • OR to pay debt down to qualify for a higher purchase price
      • OR to do much needed maintenance and repair of your new home
      • OR to furnish your new home

If your only goal is BEST RATE – and you do not need extra funds for projects or costs, the cash back mortgage option is not ideal as it does sit approximately .60% higher than best rate on the market.  (example: if best rate is sitting at approximately 2.69% – a 3% cash back mortgage rate may be approximately 3.29%) *subject to change daily* 

Does your home need new SHINGLES? A fresh coat of PAINT? A new FURNACE? Back yard need some TLC? Need new Appliances?

Want to pay down a Line of Credit or Credit card? Cash Back can be used for all of those things. 

Cash Back can be made available for PURCHASE or RENEWAL transactions.

Who qualifies for a Cash Back mortgage?

  • Credit must be good to great
  • Income must support the request under traditional ‘income vs debt’ ratios required for lender approval
  • The overall request to the lender (file strength) must be in place for the lender to consider
  • Cash Back is available: 1%, 1.5%, 2% or 3% (rates adjust a touch higher depending on the percentage of cash back you need)
Let’s look at some numbers and Case Studies on how a Cash Back mortgage may work

CASE STUDY #1- PURCHASE (Cash Back to increase borrowing power) 

  • Client makes $62,000 Gross per year
  • Credit score is 680
  • Credit has been established for 2 years and maintained and paid well
  • Client has $8000 remaining on a vehicle loan with payments of $347.00/month
  • Client has saved $17,000 for downpayment and closing costs and wishes to purchase a $300,000 home

 

  • In this scenario the client would only qualify for a Purchase of $270,000.00
  • =$1213.67/month  at best rate (ex: 2.64% 5 yr fixed)
    •  Downpayment $13,500.00
    • Closing costs (legal fees) $2000-$2500
    • =$16,000.00 needed to close
    • In summary:
      • the client has enough funds for closing costs and downpayment
      • they can only purchase a home for $270,000.00
      • they still carry the $8000 loan ($347/m) limiting their borrowing power

VS

  • With Cash Back of 3% the client would qualify for a purchase of $290,000.00
  • =$1398.93/month at Cash Back rate (ex: 3.29% 5 yr fixed)
  • Cash Back (3% of total mortgage with CMHC premium)=$8595.60
    • Downpayment $14,500.00
    • Closing costs (legal fees) $2000-$2500
    • =$17,000.00 needed to close
    • In summary:
      • the client has enough funds for closing costs and downpayment
      • they can purchase a home closer to their request up to $290,000.00
      • they have paid the loan with the Cash Back eliminating the $347/m payment
      • They would have an additional $595.60 in cash back to put towards moving costs

CASE STUDY #2- PURCHASE (Cash Back to do improvements to the home)

  • Using the same client criteria as ‘CASE STUDY 1’
  • The client does not have any other outstanding debts affecting their overall income vs debt ratios
  • The client only has $16,000.00 saved for downpayment and closing costs

 

  • In this scenario the client simply wants Cash Back to do home improvements to the new home
  • With Cash Back of 3% the client would qualify for a purchase of $290,000.00
  • =$1398.93/month at cash back rate (ex: 3.29% 5 yr fixed)
  • Cash Back (3% of total mortgage with CMHC premium)=$8595.60
    • Downpayment $14,500.00
    • Closing costs (legal fees) $2000-$2500
    • =$17,000.00 needed to close
    • SHORTFALL of $1000.00 in closing costs
    • In summary:
      • the client has enough funds for 100% of the downpayment and most of the closing costs
      • they can purchase a home closer to their request up to $290,000.00
      • They would have an additional $8595.60 in Cash Back to put towards the $1000 shortfall in closing costs and the rest towards home improvements

CASE STUDY #3- RENEWAL (Cash Back request to do improvements to the home)

  • Using the same client criteria as ‘CASE STUDY 1’ (good credit, income $62,000)
  • In this scenario the client wants to “refinance” to payoff their $5000 credit card when they do their renewal
  • They only bought their home 5 years ago and they have not built a lot of equity
    • (Federal guidelines will only allow you to restructure “refinance” your mortgage if you have over 20% equity available.)
  • They have $253,250.00 left owing on their mortgage as of their renewal date and refinancing is not an option

 

  • In this scenario the client only needs a 2% Cash Back
  • (ex: 3.19% 5 yr fixed)
  • Cash Back (2% of total mortgage)=$5065.00
    • In summary:
      • the client renews with zero costs and gets an extra $5065.00 to pay off their credit card
      • alternatively they could have taken less (as low as 1% cash back) or more (as high as 3% cash back) to put towards other house hold upgrade projects.

This product is not for everyone – but it’s a great option to consider.

  • With rates sitting at all time historical lows the cash back offers (even at a slightly higher rate) are a wonderful solution for First Time Home Buyers who want to do a few projects to their new home to make it their own.
  • Closing costs can be covered with “Cash Back” – allowing those buyers on the cusp of qualifying due to lack of funds – ability to proceed sooner if they need to or want to.
  • The ability to access a “Cash Back” option at renewal is amazing! If there are home projects that have snuck up on you (new water heater needed? new furnace? etc) the funds can be made available.

The moral of the story?

We have access to all lender products. This is just one of them.  If ‘Cash Back’ is right for you OR something you are interested in learning more about please reach out to us anytime!

Contact us at 306.933.3386

OR APPLY online at www.elitemortgagechoice.com 

Tammy Wandzura, Mortgage Broker           Brydon Wandzura, Mortgage Associate