A cash back mortgage is a loan that once the agreement is confirmed, the borrower receives a cash advance. The cash is typically calculated as a percentage of the mortgage, but some lenders may choose to give a fixed amount based on a mortgage amount matrix. Generally, this type of loan has higher interest rates due to the cash advance.
Benefits of the TD Cash Back mortgage
The immediate availability of money can be used in various ways depending on the needs of the borrower. The proceeds of the cash back mortgage may be used to pay off debt, go towards home improvement, or fund a college education. First-time home buyers are frequently attracted to cash back mortgages as a means to pay their closing costs or furnish their property, or in some cases, the down payment.
Drawbacks of the TD Cash Back mortgage
Financial institutions need a way to recoup the money they advance to consumers and so it will always be reflected in the interest rate. Cash back mortgages have higher rates than non cash back mortgages, usually close to bank posted rates. Also, cash back mortgages have stricter conditions that need to be met.
Overall, cash back mortgages may be suitable for your situation, but it’s important to evaluate your circumstance to determine if the cash advance is worth the interest rate hike.
* based on a $100,000 mortgage
4% cash back
The term must be on a 5-year fixed rate residential mortgage
There is no maximum cash back amount.
5% cash back
The term may be on a 5, 6, 7 or 10 year fixed rate residential mortgage
The maximum cash back amount: $25,000
The pre-payment penalty, also called the cash back penalty, will be the greater of 3 months interest OR the Interest Rate Differential (IRD). In addition, there is a compensation cost which requires the borrower to return a portion of the cash advance they received upfront. This amount is calculated by a TD formula.
At first glance, the 4% TD cash back mortgage may seem like a better option versus the 5% offer, due to the limitless cash advance, but the $25,000 cap on the latter reaches its peak at a mortgage principal of $500,000. To receive the same $25,000 amount with the 4% cash back offer, you would need a mortgage amount of $625,000. With a mortgage amount that high in order to hit the cash back ceiling on the 5% offer, it’s not as limiting as it appears, considering the average Canadian mortgage is $150,000 1.
That being said, the 5% cash back offer is also available on four separate fixed terms (5-7 year and 10 year), whereas the 4% is restricted to only the 5-year term.
For those looking to pay off their mortgage faster, TD offers up to 15% annual lump sum provision and the ability to double your monthly payment. The TD cash back mortgage also offers four payment options: Weekly, bi-weekly, semi-monthly, and monthly.
The current posted TD 5-year fixed rate is 4.14%, but you might be able to get a better rate by either negotiating with a TD mortgage specialist or by talking to a mortgage broker. Currently, the lowest 5-year cash back rate on Ratehub.ca, is 4.94%
1 According to the CAAMP 2011 survey