THE TRUTH ABOUT THE ‘CASH BACK’ MORTGAGE
We often see ads from major banks offering cash back incentives of their mortgage
products. Gone are the days where a cash back mortgage could be used to facilitate a
home purchase without the required minimum 5% down payment.
Cash back incentives are now available for enticing uses such as new furniture and
appliances, renovations and the other great hook...apply the cash back portion directly
to your mortgage for a lower ‘effective’ rate!
A recent Bank ad reads “NEW PROMO...Cash Back for purchases.” The monies can be
used for any purpose. However the ad goes on to say that if you use the funds to pay
down your mortgage that “The Effective 5 Year Rate can become as low as 2.62%...”
while you are borrowing at 4.64%.
LOOK OUT. READ THE FINE PRINT. WE SAID LOOK OUT AS IN DON’T DO IT!
This is nothing but a ploy for them to make more profit off you, making it sound so good.
The truth is on a $250,000 5 year term 25 year amortization 5% cash back mortgage
receiving $12,500 you would end up paying $16,902.60 or a whopping $4,402.60 more
to the bank. The rate you get is 4.64% versus 2.62%. In other words you pay a premium
of 2.02% on your entire mortgage not just for the extra money.
Even if you apply the extra funds to pay down your new $262,500 mortgage which only
gets you back to square one, you still are required to pay the additional $4,402.60 to the
Bank. Believe it or not the ‘effective cost’ of the extra (Cash Back) money is
approximately 36%, that’s right.
THIS IS NOTHING MORE THAN A SHELL GAME!!! The Banks offer Cash Back
mortgages because they are so profitable. In fact it’s actually worse than borrowing the
money from your credit card. Why would anyone borrow more simply to apply the (much
higher cost) money against their mortgage? This makes zero sense, but people do it all
the time, and for the ‘privilege’ (I use this word, tongue in cheek) they pay the Bank
$4,402. more. Blows the mind doesn’t it?
For this reason we always always tell our clients to find another way if they absolutely
need extra money and NEVER get a Cash Back mortgage.
This is but one of dozens and dozens of examples (tricks) used to take advantage of the
uninformed consumer. Let’s be frank, trying to deal with a Bank on your own leaves you
open to losing big and in the grand scheme of things is the reason Bank profits continue
to hit new highs.
Especially when getting a mortgage (in the hundreds of thousands of dollars) it makes
sense to have a professional mortgage expert on your side to avoid things like this.
We can help you save tens of thousands of dollars and avoid stepping of a mine, as in
mortgage minefield.
Our service is always in your best interests. Please call us first or at the very least, get a
second opinion.