Pros and cons of cash-back mortgages

Pros and cons of cash-back mortgages

Buying your dream home has some unexpected expenses including home inspection fees, insurance fees, renovation, and repairs amongst others. Financial experts recommend that you put aside at least 5% of the price of your home towards such expenses. The reality is that most people would not be able to put aside this amount of money because of the huge expenses they incur while making the actual purchase of the home.

You, however, have the option of taking a cash-back mortgage. When you put down your money for the down payment of the mortgage, the bank will give you back a percentage of the principal sum when your mortgage closes.

You may then ask yourself why is it that the bank is so willing to give you back that amount of money.   The answer may be as simple as the bank is able to charge you higher interest on their standard rate due to the cash-back facility. The rates could be as high as 2% above the standard mortgage rates. There could be other penalties including the bank may withdraw the cash back if you refinance or transfer your mortgage before it reaches maturity.

 Most cash-back mortgages will have a clause on them to help protect the bank. If you sell the property and pay off the mortgage and do not take a new mortgage, then you will pay back what you had initially taken on a pro-rated basis, thus encountering substantial penalties.

 Who can get a cash back mortgage?

Not everyone is eligible for a cash-back mortgage, only those with high credit scores, low debt to income ratio and those with steady incomes are eligible. In some countries, insurance will not provide cover for those who cash-back as a down payment.

 When should you use the cash back mortgage?

Chances are that after affording to buy a home, you will not have too much money left over for the additional expenses that may arise.  While it may not be a good idea to go deeper into debt, sometimes it is the only option especially if you have no money left. You may want to consider other means of getting money, for example, taking secured lines of credit. This will result in you spending less money in paying back the debt because you avoid the high-interest rates associated with cash-backs.

If however, you feel that you’re able to pay back the high-interest rates that come with cash-backs, then it is something that you can consider. This is especially true in a situation where your property is likely to appreciate.

 Some mortgage industry players are cautious about advising their clients to take cash-backs due to the high-interest rates. This is largely because banks use it as an incentive to get people to borrow more. They would actually recommend that if you’re able to save to buy what you need, then you should consider putting off unnecessary expenses until you can do it from your own savings.

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