Mortgage Glossary

Cash Back Mortgage

Several lending institutions offer a 'cash back' incentive for choosing them as your mortgage lender.

The amount of the 'cash back' is a percentage of the mortgage amount you are borrowing - usually 3%. For example, if you borrow $100,000 you could receive as much as $3,000 back from the lender.

There are several negative aspects to these offers.

You will probably pay the full posted interest rate.
You cannot use the funds as part of your downpayment.
If you pay off the mortgage before the end of the term you will have to repay the lender some of the 'cash back' money.
The advantage is, you can choose how to spend the cash you receive. For example, you may have too much credit card debt and by paying down your debt you may qualify for a bigger mortgage.
Perhaps you need new furniture, or to make some improvements to your new house.

Is the amount of money you receive on these mortgages worth it?
The following comparison shows the difference between receiving cash now, versus saving money over the term with a discount on the mortgage rate.

Most mortgage brokers are able to get you up to a 1% discount on the posted mortgage rates.

Details	3% cash back	1% rate discount
Mortgage amount	$150,000.00	$150,000.00
Term & amortization	5 / 25 years	5 / 25 years
Interest rate	8%	7%
Cash back amount	$4,500	$0.00
Mortgage payment per month	$1,144.82	$1,050.62
Interest paid over 5 years	$56,892.85	$49,604.35
Cash back versus discount savings	$4,500	$7,288.50

As you can see, you will save more money over the term by getting a lower interest rate.
The question you need to ask yourself, do you need the money now, or if the lower monthly payment and lesser interest paid is more important.
Discuss your situation with a BCmortgages broker to see which is the best for your circumstances.

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