Cash-Back and No Money Down Mortgages
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Everything You Need to Know Before Committing
Buying a home is scary – it’s the biggest purchase of your life. Not only do you have to work hard to save up money for a down payment and get approved for a loan, but you also have to think about a lot of other expenses – closing costs, repairs, furniture, and more. So it doesn’t come as a surprise a lot of lenders will come up every now and then and offer to help you out a bit by not asking for a down payment, or even offering cashback. Sounds appealing, right? Still, you have to be very cautious when it comes to dealing with cashback or zero down payment mortgages.
What is a Cash-Back Mortgage?
With a cashback mortgage, a lender will allow you to receive up to 5% cashback, some even go up to 7%. For example – you are taking on a $750,000 mortgage with a 5% cashback. Your mortgage is registered for the same amount, but you get $37,500 back after the mortgage is closed. What’s important to notice is that the $37,500 is technically a loan that you are actually paying back.
Also, cashback mortgages come with higher interest rates and a fixed rate. Furthermore, with these mortgages come penalties for refinancing or breaking the mortgage term early. You might be asked to pay back all or some of the cash on top of it, too.
Still, for applying for this type of mortgage, you must be eligible and meet a set of conditions.
Can You Really Get a Mortgage With No Money Down?
Technically yes, but that doesn’t mean you should. If you can afford it, a down payment is always a good idea, if you care about your financial health. Zero down payment mortgages were outlawed by the Canadian government back in 2008, but there are still some ways you can get them. No money down mortgages usually include borrowing the money for the down payment, which can be unsafe. Without the down payment, there is no home equity cushion and a large amount of debt.
Home equity is the difference between what you paid and the amount you still have to pay. If you decide to sell your house without paying off the mortgage, you can still receive back the money you paid, in cash. That way you always have a plan B in case of emergency. Also, no down payment means higher interest rates plus the mortgage insurance. So, in the end, you will be paying much more than you would have if you had given the down payment first.
So, as we said, a down payment is always a good idea. If you can’t come up with the money, you can borrow some from your RRSP. Also, there are programs the Canadian government offers to first home buyers, too.
The Benefits of These Alternative Mortgages
These mortgages could work well with people that need money right away and don’t mind paying the higher interest and additional costs. You pay your mortgage and the cashback loan with the same monthly payments and since housing prices are rising, the bigger amount you had to pay will eventually play itself out. Still, you must be careful and decide whether you want to count on variable things or not.
Why They Can Be Dangerous
While tempting, these mortgages come with a few drawbacks:
- Higher interest rates
No variable-rate option – so even if the rates go low, you still have to pay the same amount of money each month - Rigorous penalty fees if the contract is broken – you will have to pay a penalty fee and pay back all or some percentage of the money you got as cashback
- No Home Equity + additional cost for mortgage insurance (for zero down payment mortgages)
- And they’re not available for everyone. In order to qualify for a cashback mortgage, for example, your credit score must be at least 650 and they are not available for self-employed people, contractors or freelancers.
Things to Consider
Before you decide to commit to these options, try putting all the pros and cons on a piece of paper. Sometimes it might benefit you not to take the plunge and buy a property. If you’re struggling to come up with the 5% for a down payment, it might be even harder to pay off the mortgage. Whatever the case might be, here are a few things to consider.
Alternatives
- Personal Loan – if your credit score is good, you shouldn’t have problems finding good rates for a personal loan
- Borrowing from RRSP – while not an ideal solution, borrowing from your future is an option you have. You can borrow up to $35,000.
- Credit Card – a low-interest credit card gives you flexibility for paying off additional costs, like moving costs, etc.
The Higher The Cash Back, The Bigger The Credit Score
If you want the 5% cashback, which is considered a high-ratio cashback, make sure your credit score is perfect. A high credit score gets you a high cashback.
Commit To A 5-Year Term
In Canada, cashback mortgages usually last for five years. If you go for that one, commit to it. There are big penalty fees you will have to pay if you decide to break the 5-year term. For example – if you decide to sell your house after 2 years, you will have to pay a penalty fee and pay back all or some percentage of the money you got as cashback, depends on the lender.
Work With A Mortgage Broker
A mortgage broker can help you get the perfect lender for your financial situation. They know which lenders offer these options, and experience and skills will get you the best possible rate.
Should You Go For It?
Between the global pandemic and red-hot housing market, first-time buyers are being drawn in by promises of getting a low-interest mortgage with no money down, or one that offers cash-back. While this can seem like a great way to get your foot in the market, it’s important to weigh the pros and cons carefully. Work with a mortgage broker and get the advice you need, based on your financial situation. Contact us today.
