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BC Mortgage - Understanding the cost of cashbacks |
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Don't think you're saving any money when you get a cashback. The lender will recoup the cashback with higher interest over the life of the mortgage. If you really want to get a cashback, BC Mortgage suggests that you request your mortgage professional for an analysis of the added cost of the cashback.
Cashbacks
allows the borrower to get between 1% to 6% of the mortgage
amount when the mortgage is advanced.
Money you could use for furniture, renovations,
appliance, or whatever you need to use it for.
But, is it really a good deal?
BC Mortgage has reviewed some cashback programs and here is what we've found. The cost of the cashback can be substantial depending on the lender. These calculations assume a mortgage of $200,000.
Notes on the tables:
The cost of the cashback depends on the term, cashback amount and the added interest you pay over the term of the mortgage for the cashback.
1) The 1st column shows the mortgage term;
2) The 2nd column shows the percentage cashback;
3) The 3rd column shows the interest rate you would get without a cashback;
4) The 4th column shows the difference in interest rate between the rate with a cashback mortgage and a mortgage without a cashback;
5) The 5th column shows the amount of cashback on a $200,000 mortgage for the indicated term
6) the 6th column shows the additional interest and payments for a cashback mortgage
7)
The 7th column shows the added cost of a cashback mortgage
less the amount of the cash back. You can consider
this the cost of the cashback.
Lender 1
|
Term |
Cashback |
Best |
Rate with |
Difference |
Cashback |
Additional |
Difference |
|
2
yrs |
1
% |
4.00
% |
5.00
% |
1.00 % |
$
2,000 |
$
3,694 |
$1,694 |
|
3
yrs |
3
% |
4.45
% |
5.65
% |
1.20 % |
$
6,000 |
$
6,421 |
$
421 |
|
4
yrs |
3
% |
4.85
% |
6.20
% |
1.35 % |
$
6,000 |
$
9,254 |
$
3,254 |
|
5
yrs |
3
% |
4.94
% |
6.35
% |
1.41 % |
$
6,000 |
$
11,671 |
$
5,671 |
|
7
yrs |
4
% |
5.45
% |
7.35
% |
1.90 % |
$
8,000 |
$
20,369 |
$
12,369 |
|
10 yrs |
5
% |
5.85
% |
7.85
% |
2.00 % |
$
10,000 |
$
27,234 |
$
17,234 |
As
you would expect, the additional interest and payments over
the various terms exceed the cashback amounts.
This is especially pronounced in the 10-year term
where the cashback is $10,000 versus additional payments of
$27,234.
Lender 2
|
Term |
Cashback |
Best |
Rate with |
Difference |
Cashback |
Additional |
Difference |
|
5
yrs |
4
% |
5.00
% |
6.05
% |
1.05
% |
$
8,000 |
$
8,677 |
$
677 |
|
6
yrs |
5
% |
5.10
% |
6.15
% |
1.05
% |
$
10,000 |
$10,029 |
$
29 |
|
7
yrs |
5
% |
5.50
% |
7.05
% |
1.55
% |
$
10,000 |
$16,561 |
$
1,561 |
|
10
yrs |
5
% |
5.90
% |
7.50
% |
1.60
% |
$
10,000 |
$
12,980 |
$
2, 980 |
Lender 3
|
Term |
Cashback |
Best |
Rate with |
Difference |
Cashback |
Additional |
Difference |
|
5
yrs |
1.5
% |
4.94
% |
5.70
% |
0.76
% |
$
3,000 |
$
6,237 |
$
3,237 |
|
5
yrs |
2
% |
4.94
% |
5.86
% |
0.92
% |
$
4,000 |
$
7,599 |
$
3,599 |
|
5
yrs |
3
% |
4.94
% |
6.20
% |
1.26
% |
$
6,000 |
$
10,423 |
$
4,423 |
|
7
yrs |
3
% |
5.49
% |
6.39
% |
0.90
% |
$
6,000 |
$
9,580 |
$
3,580 |
|
7
yrs |
4
% |
5.49
% |
6.70
% |
1.21
% |
$
8,000 |
$
12,905 |
$
4,905 |
|
10 yrs |
1.5
% |
5.88
% |
6.23
% |
0.35
% |
$
3,000 |
$
4,690 |
$
1,690 |
|
10 yrs |
3.0
% |
5.88
% |
6.60
% |
0.72
% |
$
6,000 |
$
9.684 |
$
3,684 |
|
10 yrs |
4.5
% |
5.88
% |
6.97
% |
1.09
% |
$
9,000 |
$
14,711 |
$
5,711 |
Remember:
Should you decide to prepay your mortgage, the lender will
want part of the cashback since they recoup the cashback
from the higher interest rate over the life of the mortgage.
In
conclusion, cashbacks can make it difficult to compare
offers. If you
have a need or preference for a cashback, please contact BC
Mortgage for analysis of the lowest cost cashback for your needs.
Note:
interest rates quoted to BC Morgage as of September 23, 2003
* Present values of the difference in maturity
value and additional interest payment
"My job is done when you know your options"
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