Banks seldom give mortgage shoppers one red cent unless that penny generates multiples for the bank in return.marchmeena29/iStockPhoto / Getty Images
Seemingly every big bank wants to stuff your pockets with cold hard cash these days.
$1,000 … $2,000 … $3,000 … even $5,000, depending on your mortgage amount – all for simply granting them the gift of your mortgage business.
Lenders have advertised cash bonuses for decades, but the amounts have gotten bigger in recent years.
It’s happening because lenders are battling tooth-and-nail for a shrunken pool of business, but they don’t want to lower their rates for everyone. So they try to buy off new customers with cash back instead.
Cash bonus offers can seem like one heck of a perk – until you run the numbers.
McLister: This week’s lowest fixed and variable mortgage rates in Canada
Math reveals the drawbacks
Believe it or not, banks seldom give mortgage shoppers one red cent unless that penny generates multiples for the bank in return.
Their return on cashback offers is significant. In exchange for that fat stack of dough, they often charge higher interest rates than they otherwise would. And then, once they’ve got you, they can try and sell you more stuff: investments, new accounts, credit cards, etc.
Here’s a simple example with numbers:
Take a $500,000 mortgage, which currently qualifies for $2,500 cash back at some banks.
Now let’s say the bank’s five-year fixed rate is 5.24 per cent. That is 35 basis points above the leading national lender, HSBC, which as of Thursday sold a similar mortgage for 4.89 per cent. (A basis point is 1/100th of a percentage point.)
The five-year interest cost difference between those two rates is $8,415, given a 25-year amortization and no extra payments.
Now, I’m not sure about you, but my home economics teacher taught me that paying $8,415 more to get $2,500 back doesn’t help you retire quicker.
If you want to run the numbers on your own scenario, check out RateSpy.com (my old company’s website, full disclosure). It has a simple calculator that can estimate the interest difference between any two rates.
Other details
If you break the mortgage early, not only will you pay a prepayment penalty – which can be painful at some lenders – you’ll likely also have to pay back part of the cash you got, based on how much time remains in the term. That’s how it works at most cashback lenders anyhow.
And by the way, most of these lenders make you open a new chequing account to get the money, if you don’t have one already. Some require you to get a minimum term, like a four-year fixed or longer. Some only offer cash rebates on default-insured mortgages.
The take-away
If you’re sure you won’t break your mortgage early, and if you get a great rate with your cashback, and you run the numbers to ensure you’re getting fair value and you actually need the cash, then cashback mortgages can theoretically have value.
But we’re talking about a very small slice of cases here. Odds are, you’ll save a lot more but choosing a materially lower rate, all else being equal.
As always, evaluate the fine print and all the other features before deciding between different mortgages.
And if you’re taking a longer-term fixed rate, ask the lender how it calculates its break penalty because hundreds of thousands of borrowers will break their mortgage when rates come down in 2024 or 2025. And a brutal penalty can often cost over five times the value of any cash you receive.
Fixed mortgage rates edge higher
Our bond market is rather unhappy with the piping-hot job growth and inflation reports as of late. And when bond investors aren’t happy, they sell bonds, which drives up interest rates. That’s exactly what’s been happening for the past few weeks.
The impact on mortgages this week was a five- to 10-basis-point boost to some of the lowest rates in the market. Variable rates are unchanged.
Among the standouts this week, QuestMortgage still has unbelievably low short-term default-insured rates. If you’re a believer that rates and inflation have peaked, and you’re risk-tolerant and financially stable, a one- or two-year fixed at 4.64 per cent is sensational.
For those needing uninsured mortgages, the 5.19 per cent three-year at HSBC has value – mainly for risk-averse borrowers who need financing for three full years.
Meanwhile, many risk-tolerant borrowers are gravitating to shorter terms and paying a premium for it. The thinking is that they’ll refinance into a falling rate market in 2024 or 2025. If the Bank of Canada trims rates by early next year as markets now anticipate, those shorter terms will outperform longer terms, even though they cost more up front.
Rates are as of Feb. 16, 2023, from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
