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What Is a Cash Back Mortgage?

Purchasing a home is a major expense. After saving up for a down payment you may realize that there isn’t enough money left over to help with closing costs, pay for renovations, furniture, landscaping etc. That’s where a cash back mortgage comes in. Many lenders offer a cash back rebate when you take out a mortgage.

With a cash back mortgage, a lender gives you a lump sum cash payment when the mortgage closes. How much depends on which lender you use. With traditional lenders, the most popular amount is five percent of your mortgage. Depending on which lender you use though, you can get anywhere from one percent to seven percent cash back on your mortgage.

Since the cash back is given once the mortgage closes, it cannot be used for the down payment. The cash back mortgage is tax-free and can be used for virtually anything you like: closing costs, renovations, furniture, or paying down other high-interest debts like credit cards.

How Does a Mortgage Cash Back Work?

How does a mortgage with cash back in Canada work? Let’s say you purchase a home for $350,000 and have a 20% down payment of $70,000. You choose a five-year mortgage with a rate of 3.79% that offers one percent cash back.

With the down payment, you’ll end up borrowing $280,000 from the bank ($350,000 – $70,000). Of that, you get a one percent cash rebate of $2,800 ($280,000 x 1.00%). If instead you opted for a five percent cash back mortgage, the lender would give you $14,000 up front.

Nothing is free when it comes to banks. A cash back rebate is always attached to a fixed mortgage and the rate is going to be a little higher than the interest rate attached to a standard, non-cash back, mortgage. In the example above, the standard mortgage rate would probably be around 3.25%.

That little extra bit of interest can add up.

Using the first example, if you selected a five-year fixed mortgage rate of 3.75%, you would end up paying the lender an extra $4,378 over the five-year term. That’s after you deduct the cash rebate you received when you closed the mortgage. Not everyone is willing to pay $4,378 for an upfront mortgage rebate of $2,800.

Eligibility for Cashback Mortgage

Not everyone qualifies for a cash back mortgage. Most traditional lenders, (Canada’s big banks) only offer them to those who have high credit scores, a low debt-to-income ratio, and full-time job (steady income). You also have to be living in the residence you’re buying; meaning, no renters can be on the property in question.

If your credit score is bruised or you’re new to Canada and don’t even have a credit score, or are self-employed, your odds of qualifying for a cash back mortgage is very remote.

Is a Cash Back Mortgage Right for You?

Like most financial products, there are benefits and drawback of a mortgage with cash back. On the plus side, the cash back you get when you close your mortgage is tax-free and can be used for whatever you like.

A cash back mortgage can be a good idea for those who need the money right away and don’t mind paying the slightly higher interest rate over the term of the mortgage. Thanks to a strong real estate market, the amount you paid in higher interest is offset by rising housing prices.

At the same time, you will be hit with penalties if you refinance, renew, or transfer your mortgage. That’s because cash back mortgages are only available with fixed term mortgages with a minimum term threshold.

If you refinance or break your mortgage early, you will probably be on the hook for a percentage of the cash back rebate (pro-rates based on the number of months left in the term). Some lenders will require you to pay back the entire amount in full.

This is an important consideration. Because the average Canadian moves, on average, every three years, a large number of homebuyers renew or refinance their mortgage. Depending on the lender, you could end up owing the usual three months interest on the balance (for breaking the mortgage) and the balance on the cash back mortgage.

FAQs about Cash Back Mortgages

1. Is mortgage cashback taxable?

The money you receive from a cash back mortgage is tax-free.

2. When is mortgage cashback paid?

Technically, the money you receive upfront with a cash back mortgage is paid back by the slightly higher interest rate you agreed to when you secured your mortgage. But because of the higher rate, you’ll pay more interest over the life of the mortgage term than the cash back you received.

3. What is the interest rate for cash back mortgage?

Cash back mortgages are always attached to a fixed-interest rate mortgage. And the rate that comes with a cash back mortgage is always a little higher than a standard mortgage.

4. Does credit score matters for cash back mortgage?

Credit scores are indeed important when it comes to securing a cash back mortgage. A good credit score means you have a long history of paying your bills on time. In addition to having excellent credit, you need to have a good credit profile and a steady, provable, income stream.

Canadalend.com, Helping Canadians Secure Home Equity Loans

If you don’t mind the higher interest rate, a cash back mortgage can be a great option for homebuyers who need a little extra money in the early stages of home ownership. To see if a cash back mortgage is right for you, speak with a licensed mortgage professional at Canadalend.com.

The mortgage experts at Canadalend.com are independent, that means they are looking out for what’s best for you. Traditional lenders, like Canada’s big banks, only want to sell you their own financial products, even if it’s not in your best interest.

The independent mortgage professionals at Canadalend.com have access to hundreds of different lends. Many specialize in providing mortgages and cash back mortgages to homebuyers with bad credit, no credit, and unreliable income.

To see what kind of cash back mortgage you qualify for, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.

Canadian Mortgage Interest Rate Fundamentals

For most Canadians, the biggest financial transaction they will undertake is buying a home. Very few Canadians can afford to purchase their home outright, meaning, most have to qualify for a mortgage. Unfortunately, few Canadians fully understand how mortgages work and are priced. Most know they want a low interest rate, but don’t appreciate what kind of impact a seemingly small 0.25% mortgage interest rate hike will have on the total cost of their mortgage or how it will impact their day-to-day living.

A quarter point rate hike might not seem like a lot, but it adds up. If you have a $200,000 mortgage and an interest rate of 2.8%, you would pay around $926 monthly. With a mortgage rate of 3.6%, that same mortgage will now cost $1,009 per month.

Fixed-Rate or Variable-Rate Mortgages?

One big factor that dictates mortgage interest rates is whether you have a fixed-rate or variable-rate mortgage. The majority of Canadian homeowners have a fixed-rate mortgage; with this, you make the same interest rate mortgage payments each month.

Homeowners like fixed-rate mortgages because they like knowing how much they pay each month and the security of knowing they are protected if interest rates rise.

Nothing is fool proof though, fixed-rate mortgages often come with harsher penalty fees should you break the mortgage.

Homebuyers who want more flexibility and aren’t worried about rising interest rates prefer variable rate mortgages, which fluctuate with the market. Like a fixed-rate mortgage, you make the same monthly payments, but the amount that goes to the principal will fluctuate.

How Is Mortgage Interest Calculated in Canada?

How mortgage interest is calculated in Canada is not a simple question to answer. That’s because it involves a complicated equation and compounding interest. That’s where an easy-to-use mortgage calculator comes in handy.

For starters, it’s important to ask your lender what the effective rate on your mortgage is, because it is often higher than the posted rate.

If your mortgage interest rate is compounded semi-annually, that means the interest is compounded twice a year instead of just once. For example, if you are quoted a mortgage at 6%, because the equation used to determine interest rates compounds, it could really be 6.9%.

There are even some mortgages that are compounded monthly and even daily. The more often a mortgage is compounded, the higher your monthly interest rate will be. That’s why it’s important to understand the difference between the posted rates and effective rates before you get a mortgage.

For those who do want to try figuring it out on your own, you will need your payment amount and the PV facto—that is, the number of months in your mortgage term, or, the total number of payments.

To figure out your interest rate:

• Principal = (PV Factor) x (Payment)
• Payment = (Principal) / (PV Factor)

Dividing the principal by the total number of payments will give you the total payment amount.

Determining how mortgage interest rate is calculated in Canada is not easy, which is why it’s easier to use a mortgage loan calculator to find out what the exact interest rates and payments will be.

FAQ’s about How Mortgage Interest Rate Is Calculated

How often is interest compounded on a mortgage in Canada?

It depends on what kind of mortgage you get and the lender you go to. Fixed-rate mortgages in Canada are compounded, by law, semi-annually. Twice a year, unpaid mortgage interest is tacked on to the principal of the loan.

Do mortgage payment go down over time?

No. Whether you secure a fixed-rate mortgage or variable-rate mortgage, the payment stays the same. The amount going toward the principal changes though. Paying off the principal as quickly as possible will reduce the amount you pay in interest.

My credit score is low. Will that affect my mortgage interest rate?

Yes. The lower your credit score the higher the interest rate on your mortgage. The reverse is also true; the higher the credit score, the lower the interest rate on your mortgage will be.

Traditional lenders punish people with lower credit scores by offering them mortgages with higher interest rates. They believe those with a low credit score are more likely to miss a mortgage payment or even default on their loan.

What is a minimum credit score for mortgage Canada?

In Canada, credit scores range from 300 to 900. Because credit scores show how likely you are to pay your bills on time, the lower the score, the better the odds are you could default. To get the best rates, some lenders insist on a minimum score of 680. Alternative lenders on the other hand are not as concerned about credit score and provide mortgages to those with credit scores of 620 or lower.

Can I get lower interest mortgage if my credit score improves?

Absolutely. Banks save their best mortgage interest rates for those with the best credit scores. You can improve your bruised credit by paying your bills on time. It also helps to use your credit more, that’s because your credit score is based on your ability to manage your finances. Just make sure to keep balances on credit cards and other revolving credit at a minimum. All of this will help improve your credit score, which, in turn, can help your get a mortgage with the best interest rates and terms.

Canadalend.com, Helping Canadians Secure Home Equity Loans

If you’re looking at securing a mortgage with the best interest rates and terms, it’s imperative that you understand how interest rates are calculated and apply to your mortgage. The licensed mortgage professionals at Canadalend.com can help with that.

Why choose Canadalend.com over the big banks or other private lenders? The mortgage experts at Canadalend.com are independent. That means they are looking out for your best interest. Canada’s big banks will only push their own products on you, even if it’s not in your best interest.

Because the mortgage professionals at Canadalend.com are independent, they have access to hundreds of different lenders. Many specialize in providing mortgages to homebuyers with bad or no credit, unreliable income, or have declared bankruptcy.

To see what kind of mortgage you qualify for, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.

It’s pretty common to hear about homeowners being rejected for a home equity loan when they have bad credit. But did you know that you can still be rejected for a home equity loan even if you have good credit?

Good credit can help you qualify for a mortgage, but it doesn’t mean you’ll automatically qualify for a home equity loan. While a good credit score is one indicator that shows lenders there’s a good chance you’ll be able to pay the loan back, it’s not the only thing they look at. Below are just some of the reasons why the big banks and trust companies could reject your home equity loan.

Income vs. Debt Ratio

When you qualified for a mortgage you likely had a good credit score and probably low debt levels. But circumstances can change quickly. Racking up unexpected debt and a change in your income level could be one of the reasons why your home equity loan was rejected.

When you apply for a home equity loan with a traditional lender, they look at how much you earn and how much debt you have. This helps them decide whether or not you can afford a new loan.

On top of that, traditional lenders have minimum and maximum requirements for income and debt. If you don’t meet that threshold, you’re going to get rejected. For most traditional lenders, the debt-to-income ratio is 43% to 49%. That ratio is the percentage of monthly gross income that goes toward paying your debt.

Unreliable or Low Income

How much you make doesn’t impact your credit score. It can, however, get in the way of obtaining a home equity loan. If your job situation has changed and you make less than you did before, your loan application could get rejected.

You could face the same challenges if you’re self-employed too. A lot of Canadians are entrepreneurs, and that’s an issue for traditional lenders. Over the last number of years, Canada’s big banks have implemented a number of strict lending rules that put self-employed Canadian homeowners at a disadvantage.

In the past, self-employed Canadians and those with unreliable, inconsistent income simply had to state how much they made. Not anymore. Now they have to prove it.

If you’re self-employed, you understand that, for tax purposes, you might draw a smaller income. That decision will come back to haunt you if you use a traditional lender for a home equity loan.

If you’re self-employed you also know that income streams can be unreliable and inconsistent. That too could be why you were rejected for a home equity loan.

A Foreclosure or Bankruptcy

If you’ve filed for bankruptcy or experienced a foreclosure, it will impact your credit score for six years from the date your bankruptcy was completed. If you’ve filed for bankruptcy twice, it could last on your credit report for 14 years.

That means, that even after you’ve recovered from your bankruptcy and repaired your credit score, traditional lenders could still decline your home equity loan application.

FAQ’S about Mortgage Declined with Good Credit Score

Q. What is a good credit score for getting a home equity loan?

The credit score requirements for a home equity loan vary depending on the institution and amount. The bigger the lender and loan, the stricter the lending rules. Credit scores (300 to 900) show how likely you are to pay your bills on time. The higher the score, the lower your odds are of defaulting. To get the best rate, some lenders insist on a minimum score of 680.

Q. Does being denied a loan affect my credit rating?

No. Being denied a home equity loan will not negatively impact your credit score. Your credit report will show that you made an application, but it doesn’t show if your application was approved or denied. In fact, no borrower can access that kind of information.

Q. Doesn’t checking my credit score impact my credit score?

Yes and no. There are two different types of inquiries: hard and soft. A hard inquiry is made when you apply for credit or a loan. A soft inquiry is when you request a copy of your credit report.

With a hard inquiry, a lender looks at your credit score and determines whether or not you will be able to make the monthly payments. The inquiry only includes the name of the lender that checked your credit and the date of the inquiry. It does not show whether you were approved or not.

Your credit score can be affected by the number of recent inquiries. Each new inquiry that occurs over a short period of time can knock a few points off your credit score. That only happens because it shows you are trying to take on new debt.

Being docked a few credit points is not as dire as it sounds, and it disappears over the course of a few months.

The only way it could affect your credit score is if you make a lot of loan inquiries over a short period of time. Applying for a home equity loan with a number of lenders could make you look like a credit risk.

Canadalend.com, Helping Canadians Secure Home Equity Loans

If you have good credit and have been denied a home equity loan, contact a mortgage expert at Canadalend.com. The mortgage specialists at Canadalend.com are independent, this means we have access to hundreds of different lenders—lenders that specialize in helping those who have been turned down by traditional lenders access the equity they’ve built up in their homes.

How can we provide better service than traditional lenders? Canada’s tighter lending rules only apply to Canada’s big banks. Alternative lenders, like the ones Canadalend.com work with, are not bound by the same lending rules.

Many of the lenders we work with specialize in providing home equity loans and mortgages to those who are self-employed, have a recent employment history, bruised credit, no credit, unreliable income, or even declared bankruptcy.

To see what kind of home equity loan you qualify for, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.

As a homebuyer pursuing a mortgage from prospective lenders, how do the professionals determine what you are pre-approved for?

You Need a Pre-Approval

When it comes to affording and purchasing a home, individuals require a pre-approval from a bank or other credible financial institution. Lenders determine how much they deem you can reasonably pay based on a number of factors. While it may be mysterious to some, the general principles of income and assets play an important and obvious role. So how do the calculations actually work?

The Mortgage Paperwork

Someone applying for a mortgage pre-approval must provide a range of documents, including paystubs and T4s, employment and financial account information, proof of assets and liabilities, and from where you can take money for your down payment. A financial institution or other lender will also research your credit score. Once approved, experts recommend for prospective buyers to purchase a home below the maximum amount with which they are presented.

Lenders are Risk Averse

The figures you receive during and after a pre-approval meeting consider various parts of your financial past and present. In addition to your income and assets, lenders take into account your current debts and credit, not to mention the costs you will be paying for and at your new home. That includes the purchase itself, but also heating costs, condo fees (if applicable), and property tax.

Make Yourself Attractive to Lenders

Essentially, the more you earn and the better your credit, the more stable of a position your lenders will perceive you to be. The fewer debts and liabilities you have, the better. Everything is taken into account for such a significant purchase like a home. In Toronto, the average detached property is valued at over one million dollars, after all.

If you are wondering how you may be able to boost your rate, simply maintain your good financial health and avoid frivolous spending. Find a better paying job, pay your credit cards on time, pay off your student loans, and ensure a spouse or partner you will be purchasing the home with has a solid financial reputation, as well.