# Downside to cash back mortgages?



## Sampson (Apr 3, 2009)

We are considering switching to a lender that is willing to offer 2% cash back on the loan amount - for a 5 yr closed FRM.

I've read the article by MDJ Cash Back Mortgages are a bad idea, and from what I gather, its the interest rate differential that makes it disadvantages.

I'm exploring an option where the interest rate differential is a measly 0.25%. Sounds good to me because even if I break, I don't pay interest on that cash back amount.

Aside from this and the fact you have to return the money if you break the mortgage contract, are there any other downsides?


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## canabiz (Apr 4, 2009)

Sampson, I have also been offered the same deal by one of the Big 5 (now Big 6 with National Bank joining the fray?)

From what I gather, there's a COMPLETE and FULL CLAWBACK of all cashback funds if I was to alter the mortgage in any way (port/break/blend&extend). On the flip side, the cashback will come in handy for the penalty that we have to pay to our current institution. 

The difference between non-cashback and cashback rate for this lender is about 0.25%. Gun to my head, I think we will suck it up to pay the penalty and go with the lower rate.


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## Sampson (Apr 3, 2009)

Hehee, I see it as free money -  - our cash back is more than the penalty to break, so we're getting roughly $2500 reduction in our principle balance (interest free).


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## canabiz (Apr 4, 2009)

If that's the case then you may as well go with the cashback.

For us the cashback represents about 60% of your penalty so every little bit helps...I still have to sit down with a mortgage specialist and crunch all the numbers before signing on the dotted line. We do have a 90-day window so I am waiting for my current lender to get back to me and see if they can lower their rates...if not hasta la vista baby.


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## FrugalTrader (Oct 13, 2008)

Sampson said:


> Hehee, I see it as free money -  - our cash back is more than the penalty to break, so we're getting roughly $2500 reduction in our principle balance (interest free).


In your case Sampson, it looks like the cash back mortgage may be to your advantage. My beef was the interest rate differential and generally speaking, people will "spend" the cash back instead of paying down the mortgage or other debt.

If you don't mind me asking, which big bank is offering the 2% cash back?


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## Sampson (Apr 3, 2009)

Hey FT,

I guess anonymity is a good thing sometimes? (Hope the person we are dealing with isn't reading).

Starts with C- and ends with -C 

Its also a quick close - looking around, its still seems like traditional 'cash back' mortgages have a significant (+1.5%) interest rate differential over the lowest rates.

I'm really trying to juggle and decide if I think rates will go side-ways for a while. Must be tough for you if you are considering breaking a Prime-minus VRM.


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## FrugalTrader (Oct 13, 2008)

Sampson, yes you are right, it is a very difficult decision. Even though 4% is a great 5 year fixed rate, it's a long way from 1.65% that I'm currently paying. Question is, how long will it take to catch up when prime rates rise, and where will rates be when my mortgage comes up for renewal in 2 years.


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## Sampson (Apr 3, 2009)

FT, you would have diversification of interest rate risk though, since you are also doing the SM - and you could obviously increase your HELOC amount if rates remain low. Not as good as your Prime-minus - but still below 4%.


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