No More Cash Back Mortgages

The second significant mortgage rule change imposed by the Office of the Superintendent of Financial Institutions (OSFI) is the elimination of “Cash-Back” mortgages.  These mortgages offer the borrower a cash incentive or bonus once the mortgage closes.  The amounts are significant and usually represent 5% of the mortgage balance.  On a $300,000 mortgage this amounts to $15,000!  A much better gift than a new toaster.

If it sounds too good to be true its because it is.  In order to receive the cash-back incentive the borrower needs to accept an interest rate about 1.8% higher than the regular 5 year fixed mortgage rate.  On that same $300,000 mortgage that represents about $27,000 in extra interest over a 5 year term.  $15,000 received now to be paid back as $27,000 over 5 years is not a good financial decision.   Easy math.

This product does make sense, however, when the lender allows the borrower to use the $15,000 cash-back as the downpayment for their purchase.  For the many Canadians who could never seem to save the minimum 5% downpayment this product was a viable option.  In today’s mortgage rule tightening environment it’s the people on the fringe of home ownership that are being hit the hardest.  The new mortgage mantra is; if you can’t save the 5% downpayment, then you don’t deserve to own a home.  It’s a harsh statement, but it’s the right statement.

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