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.