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Cash Rebates on Your Mortgage could Save you Money

Tuesday Feb 13th, 2024


In the dynamic world of mortgages, an intriguing trend is emerging: significant cash rebates offered by big banks. These rebates, which can be as high as $4,000 or more for substantial mortgages, represent a shift from the traditional 'cashback mortgages' and are now available on competitive rates.

The Shift to Cash Rebates:

• Banks are offering these rebates to borrowers who commit to longer mortgage terms, typically between three to ten years.

• Unlike older cashback mortgages, these rebates don't necessarily come with higher rates and are accessible even on specially negotiated, low rates.

Scenario Analysis: The Impact of Cash Rebates:

• Short-Term Versus Long-Term: Many borrowers prefer shorter mortgage terms, like one or two years, for the flexibility to reset to a lower rate sooner, anticipating changes in the Bank of Canada's monetary policy. However, these shorter terms often don't qualify for cash rebates.

• Example Analysis: Consider a borrower choosing between a 6.04% two-year fixed mortgage without cashback and a 5.49% three-year fixed mortgage with a $2,500 cash rebate. On a $500,000 mortgage with a 25-year amortization, without considering any rate changes, the two-year option initially appears to save about $200 after three years. However, once the $2,500 cashback on the three-year mortgage is factored in, the cost equation changes, favoring the three-year option. The cashback effectively lowers the interest rate, making the longer-term mortgage more cost-effective.

• Renewal Considerations: Borrowers planning to switch to a variable rate with a better discount in a few years might overlook the immediate benefits of cash rebates on longer terms.

Considerations and Risks:

• Early Termination Penalties: If you break your mortgage term early, banks may claw back some or all of the cash rebate, in addition to any prepayment penalties.

• Uncertainty in Rate Changes: Predictions about future rate declines can be uncertain. Therefore, the guarantee of a cash rebate might outweigh the potential benefits of waiting for a lower rate.

Advice for Mortgage Decisions:

• Evaluate the total borrowing cost over the term you are considering, including the impact of any cash rebates.

• Consult with a mortgage advisor to understand how different scenarios might play out based on current rates and rebates.

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