Bank branches sometimes promote them and you may have come across paper and online ads for them. So what is a cashback mortgage, and more importantly, who should consider them?

A cashback means that the lender will give you 5% of your mortgage amount back as cash. So, if you borrow $100,000 they will also lend you an additional $5,000. The cash can be used for anything however, it is really designed to help buyers who can’t come up with a full 5% down payment, the minimum down payment required to buy a home. If you are buying a home and don’t have the required 5% down payment through a cashback mortgage the lender would provide you with 99.75% of the financing (wondering why 99.75? It’s 5% of 95% financing giving you that 99.75% number). In exchange for the cashback a borrower is expected to pay a higher interest rate. Currently that rate is 4.99% as offered by the National Bank who are running a promotion.

If you’re stretching to buy a home and can’t come up with the required 5% down payment it’s tempting to think that 4.99% isn’t too bad. But once you break down the cashback offer you’ll find that it isn’t that sweet of a deal… at least not for you, the borrower.

Consider the following example (if the numbers below make you dizzy, just skip to the summary section):

Borrower A has her 5% down payment and requires a $250,000 mortgage to buy. Her mortgage is arranged with a fixed 5-year rate of 3.39% amortized over 25 years.

Borrower B couldn’t come up with 5% down payment so he opted to take $250,000 with a 5% cashback. This cashback gave him $12,500. In total borrower B receives $262,500. The cashback mortgage costs borrower B 4.99% for a 5-year term amortized over 25 years. Keep in mind that only $250,000 is registered as a mortgage for a cashback.

The following graph shows how much interest is paid by Borrower A vs. Borrower B each year given their different interest rates.

The graph shows that by the end of the 5 year mortgage term Borrower B pays $19,103 more in interest to the lender. Of course out of that $19,103 Borrower B is getting the benefit of $12,500 therefore, the cost is $6,603 ($19,103-$12,500). So the actual interest paid on a 5% cashback of $12,500 is close to 10.6% (($6,603/$12,500)/5 years).

It’s also important to note that after 5 years Borrower A‘s outstanding mortgage balance is $215,264 mean while Borrower B‘s outstanding balance is $221,233 (note: all figures are approximate).

The skinny

• The cashback in a 5% cackback mortgage costing approximately 10.6% per year to borrow over a 5 year period
• When a cashback mortgage comes up for renewal 5 years into the mortgage the outstanding balance is significantly higher
• If a borrower breaks their cashback mortgage during the 5 year term there is a clawback on the cash
• Over the entire life of the a cashback mortgage a borrower will pay more interest to the lender

For some first time home buyers the allure of stepping into your first home without needing a significant down payment can be very tempting. There maybe extreme circumstances where the 5% cashback mortgage should be considered to purchase but I wouldn’t advise anyone to step into a cashback mortgage. The premium for the extra funds is too high and if you can’t afford to save the 5% down payment then you are likely not financially ready to own a home.

If you have any further questions about cashback mortgages or any other mortgage product call me at 416.461.0204 or fill in the form below. I’m always available.

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This week, mortgage interest rates have continued a trend that we’ve seen developing over the past 4 weeks. Mortgage lenders are effectively enticing mortgage borrowers to take fixed rate mortgages by lowering their fixed rates and increasing the spreads on their variable rate mortgages.  This has created a convergence of fixed and variable making fixed rate mortgages more attractive in the current market.

Pick of the week: I’m liking the fixed 4 year rate at 2.99%. Yes it’s 12 month less than the 5 year however the discount to the rate is too good to pass up. I believe it will prove to be a rate you will reminisce about in the future when rates head up to more “normal” levels.

Disclaimer: The circumstances of individuals are unique and mortgages are not one size fits all. This is just my opinion.

1 Year Fixed – 2.50%

3 Year Fixed – 2.89%

4 Year Fixed – 2.99%

5 Year Fixed – 3.39%

5 Year Fixed (high ratio only) – 3.29%

5 Year Variable P-.25 (2.75%)

50/50 Hybrid 3.17% (effective rate)

Prime Rate is currently 3.00%

Click here to view the embedded video.

Although your periodic mortgage payments appear to be the same amount, the proportion allocated towards paying interest and paying down your balance (or principal) is constantly changing. For each mortgage payment you make, your money is first used to pay the interest on your outstanding balance and the remaining portion is used to reduce your balance.

Dynmics of principal and interest

Consider the above example of a $300,000 mortgage at 5% amortized over 30 years. The monthly payments are $1,600. In the early years of the mortgage the majority of your monthly payments go towards paying the interest portion of your mortgage. The money used to pay down the outstanding principal is only a trickle at first. As your balances reduces so does the proportion that you pay towards interest and by the end of your mortgage the majority of your money is used to pay principal with little interest expense.

Depending on your average interest rate, over a 25 or 30 year mortgage you could end up paying close to $1 for every $1 you borrow.

There are ways of saving yourself interest expense over the life of your mortgage. The key to saving money on your mortgage is to pay off the principal as fast as possible if your household budget allows it. Most mortgage lenders have prepayment privileges built into their mortgages which give you the opportunity to save your self money.

The recent global economic downturn has benefits if you are currently in the mortgage market. The market mayhem has two effects: on the one side it alleviates any pressure the Bank of Canada may have felt to increase the prime rate and secondly, as investors pour their money into safe investments like Government of Canada bonds the yield drops. A falling bond yield triggers lower fixed rate mortgages.

The following are current rates:

1 Year Fixed – 3.19%

3 Year Fixed – 3.55%

5 Year Fixed – 3.49%

3 Year Variable P-.65 (2.35%)

3 Year Variable P-.80 (2.20%) High ratio only.

5 Year Variable P-.90 (2.10%)

50/50 Hybrid 3.02% (effective rate)

Prime Rate is currently 3.00%.

If you are shopping around for a rate don’t hesitate to give me a call I may be able to not only offer you my excellent service and advice but also a market leading rate. 416.461.0204

Click here to view the embedded video.

This week there were two mortgage related headlines that we wanted to communicate to you.

1. The Minister of Finance announced 3 changes to mortgage rules that will come into effect on March 18th 2011.

2. Making less head lines than usual the Bank of Canada met and decided to keep the prime rate unchanged.

What does this mean to you?
Of the 3 changes announced by Jim Flaherty two are relevant and we have received a number of questions regarding them.

The first change is a decrease from the maximum amortization allowed in a CMHC insured (high ratio or greater the 80% loan-to-value) mortgage. Previously we could qualify borrowers based on a 35 year amortization that will now decrease to 30 years.The effect is that borrowers will qualify for less mortgage money.

If you already have a high ratio mortgage at 35 or 40 years this change will not effect your mortgage. It will only effect new borrowers who don’t have 20% down payment and are stretching to qualify. If you know of a first time home buyer who is thinking of getting into the market this year they may want to act before the changes take place.

The other change is a decrease to allowable refinance loan-to-values. Previously you could refinance your home up to 90% of market value. In an effort to force Canadians to save and not use their homes as an ATM machine the amount has been reduced to 85%. If you are currently in a situation where you feel that a refinance to a lower rate or to consolidate consumer debt is right for you then it would be a good idea to contact us to make sure that an opportunity doesn’t go by.

Mortgages are very dynamic and the guidance that we offer is based on the circumstances of each individual. If you would like to review your mortgage to make sure that you are still on track please call we’d love to hear from you. Remember that the services of a mortgage broker like myself are free of charge to you. Get me to work for you.

Chris Molder -Son Of A Broker
416.461.0204

Leading the mortgage radar this week is news about the increase of 5 year fixed rate mortgages.  Fixed rate mortgages are priced according to 5 year bond yields and have a positive relationship. Meaning that if bond yields increase then fixed rate mortgages have a tendency to increase as well and vise versa.  The market forces at play that influence bond yields are a bit more complex but this article from The Toronto Star gives a good over view for the casual reader.  Despite the increase I don’t believe that this is the end of low fixed rate mortgages, as there still remains too much uncertainty about the global economic recovery and demand for Canadian mortgage backed securities remains high.

On the note of recovery and an article that ties in nicely with last week’s Radar about the “new credit crisis“, Gary Shilling, economist and author of “The Age Of Deleveraging” highlights his theory of Why The Feds Plan Won’t Work. Gary’s theory is that the traditional monetary policy of the fed or Bank of Canada to make money cheaper to encourage us to spend our way out of recession won’t work because this is what he call’s a “Deleveraging Recession”.  Meaning that we will keep reducing our debts and borrowing, no matter how cheap money gets.  His is a very interesting theory and worth a read.

Very often with our private mortgage fund we work with individuals who are developing or thinking of developing residential lots of land and very often there is an intention to severe the lot into two lots effectively increasing the value. However there are many considerations from a legal, financing, tax planning and municipal point of view before severing your lot.

Lastly, on a weekly basis I get phone calls from borrowers inquiring about refinancing their mortgage into a lower rate give the historical low rates still available. Although current rates maybe lower than your existing interest rate it doesn’t always make sense to refinance as penalties may be too cost prohibitive or the flexibility may not suit your needs.

That is the Mortgage Radar for this week. If you have any questions regarding mortgage financing or your mortgage specifically write me at chris@tridacmortgages.com or call me 416.461.0204ext2.

Anonymous Writes in response to TD Collateral: Green Fuzzy Handcuffs:

Wow, you’re either really misinformed or deliberately twisting everything. The other banks are not sitting on the side lines waiting to see if TD’s changes works. Scotia has been doing it for years as their STEP mortgage, that’s why TD has made it switch. It’s just a matter of time that the other banks do it also. You’re just making into a big issue becuase it limits the ability of brokers to put people into 2nd mortgage with B lenders or private lenders at horrific rates.

If you really wanted to look after your clients as a true professional, maybe you would do the right research. Client’s can still move their mortgage to another lender at renewal… collateral mortgages are assumable, its just that most lenders choose not to assume them and would rather discharge the mortgage and setup a new one and it doesn’t cost thousands unless your lawyer is ripping you off. Additionally, the bank has the same options for collecting missed payments under a collateral charge as that of a conventional charge.

At the end of the day… this will save clients from brokers that don’t have their best interest at heart. A few less clients for brokers to place into their 7% rates even though they have good credit, or to lie to about not getting approved by one lender just because that lender’s commission to the broker is less than anothers.

If you’re so righteous about your point of view, then post my response so people have the chance to see the other side of things.

Response:

Dear Annonymous writer writing me from a TD Bank IP address,

Thank you for taking the time to write and share your experience and frank opinion. While there are a lot of arguments that you bring up in your response to my post, I would like to focus on just the crux of the matter. The figurative handcuffs that I am referring to.

Let us consider a typical mortgage at maturity which has been registered in the traditional fashion. Assuming that a borrower is in no need of additional funds the borrower has two options. They can:

1) accept the renewal offer from their existing lender with no cost or

2) shop around to an institution offering a more competitive rate. In this option, the majority of lenders have transfer programs in place whereby they pay for closing costs including transfer and appraisal fees. Sometime even the $200-$300 discharge fee is covered.

The current system is healthy for borrowers. It creates competition and ensures that a borrower’s existing lender stays honest and offers their clients competitive rates at renewal. Of course lenders don’t like it because it causes leakage.

Mr. or Ms. Annonymous, writing me from a TD Bank IP address, I can assure you that the spite of observers and mortgage brokers is not because we will “have a few less clients for brokers to place into our 7% rates etc.  bash broker, bash broker, bash broker, etc”. This issue is about borrowers. Me and you or anyone else reading this post.

By changing the way mortgages are registered (you are right, other lenders are doing it as well, however, the difference being 1) it is an option and 2) they aren’t encouraging registration up to 120% of market value!) the mortgage is not transferable to a new institution. Since it isn’t transferable a client would have to arrange a new mortgage with another lender incurring roughly:

1) Legal fees $699 plus disbursements & tax so total around $1,200

2) Plus appraisal $250 + tax

3) Plus a discharge fee of roughly $250.

What we are so critical about as an industry is that effectively a transaction that didn’t cost a borrower a penny before will now cost them roughly $1,700.

Now that leakage problem that the bank was suffering regarding clients leaving at maturity has been plugged.

Pre collateral charge, a retention department would have to work its tushy off to make sure a client stayed at renewal. They have to play the rate game and continuously cut the offered rate to match anything available in the market. This is good for a borrower because it means lowest possible rate.

Post collateral charge, TD can offer a posted rate and say to a borrower “go ahead switch banks. It’ll cost you though.” Bad for borrowers.

I am not self righteous nor do I have a personal vendetta against TD Bank. I am just a mortgage broker who like so many other good mortgage brokers in Canada works hard to cut through the rhetoric of lenders and demystify mortgage financing for our clients.

Regards
Christopher Molder

Click here to view the embedded video.

2.45% – 1 Year Fixed

3.34% – 3 Year Fixed

3.49% – 5 Year Fixed (quick close Dec 31sh)

3.54% – 5 Year Fixed (120 day ratehold)

3.09% – Merix 50/50 Mortgage (Fixed/Variable hybrid)

P-.70   3 Year Variable (2.30%)

P-.75   5 Year Variable (2.25%)

Prime Rate is currently 3.00%.

Bank of Canada Qualifying rate 5.19%

NOTE: Rates are subject to change without warning at the lender’s discretion.

The Canadian Association of Accredited Mortgage Professionals, a body that serves as the industry voice to government, media and regulators,  released their Annual State of the Resident Mortgage Market in Canada Report this week.  The sixth annual report compiles data to give an overview of the evolving state of the residential mortgage market in Canada.

Aside from revealing that the Canadian Mortgage Market has exceeded the $1 Trillion benchmark I found the 43 paged report contained some other statistics that might be interesting to someone other than a self professed mortgage geek like me. If you would like to read the report in its entirety click here to download the PDF version.

The following are some of the highlights from the report:

• 35% of all mortgage holders have either increased their payments or made a lump sum
payment on their mortgage in the last 12 months

• Vast majority of Canadians have ability to afford higher mortgage payments. 84% said
they could handle monthly increases of $300 or more in their monthly payments

• 90% of Canadian homeowners have at least 10% equity in their homes, 81% have over
20% equity

• 70% of Canadians are satisfied with their mortgage terms

• Despite low Bank of Canada interest rates reflected in low variable rate mortgages, a
majority (66%) of Canadians still have a five year fixed mortgage, 29% have variable
mortgages and 4% a combination

• Overall, 22% of mortgages have an amortization of greater than 25 years compared to
18% last year

• Overall home equity is 72%. For homeowners with mortgages, equity level averages
50%

• Mortgage rates continue to drop.  Average mortgage rate is 4.22% versus 4.55% last
year.  For those who took out a mortgage in the last year, the average rate was 3.75%,
72% of those renewing saw a decrease in their mortgage rate

• Overall, mortgage brokers account for 25% of all mortgages, for new mortgages in the
past year this number rises to 40%

• As of August 2010, there was over $1 trillion in outstanding residential mortgage credit in
Canada

• Mortgage arrears rate remains stable at 0.42%, lower than for most of the 1990s

• 40% of all new mortgages this year were arranged by mortgage brokers

The big news this week in mortgages is big. How big? One Trillion dollars big. The media has gone to town on this report by CAAMP. But really how much is One Trillion Dollars? Check out the video below expressing One Trillion as per July 2009 in the U.S..

Click here to view the embedded video.

You will notice in the report I posted above that the average Canadian has an interest rate of 4.22% on their mortgage. Personally I am surprised that it is that low. If your interest rate is higher than 4.22% and you read that report your next thought is “why am I the chump paying a higher fixed rate than the Canadian average?” Your next call is to your mortgage lender only to find out that the penalty to break your mortgage and refinance is prohibitively high. You are not alone. Since last year  Ellen Roseman of The Toronto Star has been crusading for borrowers like you and she points some helpful tips to possibly mitigate the pain in her blog post How Mortgage Penalties Can Hurt You. All borrowers should be aware of Interest Rate Differential even if you are a first time home buyer.

Speaking of first time home buyers, I found two items regarding the dreaded extra or unforeseen expenses associated with buying a home. Helen Morris of the National Post writes Factor In All The Expenses Aside From Your Mortgage . She does a great job of covering all of the basics and in the Montreal Gazette CMHC published an advertorial specifically for first time home buyers regarding How Much Will My Home Really Cost?

That is the Mortgage Radar for this week. If you have any questions regarding your mortgage or you are looking for unbiased advise to compare to your bankers advise please feel free to write me at chris@tridacmortgages.com or call me 416.461.0204ext2