Jason  Balewski

Jason Balewski

Real Estate Broker

RE/MAX Realty Specialists Inc., Brokerage *

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Cash Back Mortgages are Back to help with Down Payments and Costs

Recently there are some new struggles trying to save up for a full down payment or to pay off extra debts in order to buy a property.  My mortgage broker Roberto Pelaccia works with potential home buyers to achieve ownership.  Here's some helpful information provided by him regarding our Cash Back / Down Payment Assitance option:

As you may have read by now, the Bank of Canada has officially shifted their rate outlook to remain low or unchanged until 2023. 

They describe the economy as having a lot "slack" and they project hitting their target inflation rate of 2% "does not happen until 2023".  They are being clear to us that they will not move their over-night lending rate up from 0.25% until they see enough inflation to do so and at this point they don't see that happening until 2023(1).

Where do home prices go from here-- UP, UP,UP.  Prices always rise when rates stay or move lower.  Even I was convinced that this huge economic crash we experienced would create a huge crash in home prices by the end of the year.  But now we know it only made single family home prices rise. 

I feel homes are and may always be a true store of value for Canadians.  Like gold, people want real estate it when everything else is crashing. 

It's my opinion that people will do a lot keep their home.  Even it means only eat rice, cutting back on their cable bill, and renting out a room in their home, just so they can make their mortgage payment every month.  That level of sacrifice is why I don't think you will see a flood of listing that have been suggested will happen, and that is certainly why it has happened yet. 
Real people want to keep their homes for the obvious reason of shelter, but it's also because their home and being a home owner is their biggest financial accomplishment.  Simply put, Canadian home owners will do what ever it takes to protect their homes/investments.

The Bank of Canada is keeping their rates low, but some pressure is starting to push up and may create fixed rate terms to rise in the short-term.  Canadian bond rates are starting to rise.  This last week we seen the 5 year bond rate go from 0.38% to 0.48%(2).  If that trends continues to above 0.6% then I suspect that fixed rate term mortgage will increase by 0.15-0.2% as well. 

Also the Canadian government stop purchasing uninsured mortgage bonds last month.  They started purchase such bonds in the beginning of the pandemic to help keep banks more liquid.  The end to the program will mean the banks will need to have more liquid cash available for their uninsured mortgage. This creates more costs to lenders for those uninsured mortgage products, so those rate will likely rise from their historical lows.  Get your refinances in soon!! 

(1) https://www.bankofcanada.ca/2020/10/fad-press-release-2020-10-28/

(2) https://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/

The cash back mortgage and why it's becoming a powerful tool for first time buyers 

This year has seen a lot of things end, but one thing that has come back has been the cash-back mortgage. 

This product is meant for people using less than 20% down-payment, or otherwise for those looking to get an insured mortgage.  For an increased rate a lender will give you cash-back at closing.  The cash-back can be a maximum of 3% of the loan amount.  The product is suited for those who had good credit, and strong income, positive net-worth, but not the deepest savings accounts. 

3 ways the cash-back mortgage can be a game changer:

1-The cash can actually help you qualify for the loan by being a means for you to pay-off certain debts so you can meet the debt service ratios requirements.  This point can literally be the difference of being able to get a mortgage or not. It's almost like refinancing and purchasing at the same time. 

2-It can also help clients pay for their closing costs.  You need to prove you have 1.5% of the purchase price for the closing costs to be able to close on an insured mortgage.  This again can be the difference of you waiting to purchase or being able to purchase now. 

3-For some it can simply help pay for the small renovation desired or just being able to replenish their savings after outlaying most of it to get the home.  Think about it you can get 3% back- that is more than half of your minimum down-payment.  For many that is their emergency savings they probably need and desire. 

Here is a great example of it works-  Recent clients of mine- Jake and Mary.

Mary is a full-time copywriter for an advertising firm, but she is currently on maternity leave- with a return to work date. 

Jake is a self-employed graphic designer.  The are receiving the government's child care benefit payment monthly.

They had enough funds saved for their down-payment and closing costs.  BUT they had to payoff a student loan to qualify for the loan.  Also, after it was all said and done they would drain must of their savings to get the mortgage closed.

I suggested taking the 3% cash-back mortgage.  This provided them cash-back that paid off their student loan as well as put money back into their savings. That point was important to them as Mary still had 7 months on maternity leave left and wanted to make sure they had enough cash cushion until she returned to work. 

So does the math make it still worth it? _ yes it does- here a break down--

Purchase Price- $380,000

5% down-payment - $19,000

Default Insurance- $14,440.00

Total Loan amount- $375,440.00

3% cash-back- $11263.20

2.39%_3% Cashback_ vs 1.79% 5 year fixed

2.39%_monthly payment- $1661.35

1.79%_monthly payment- $1552.02

Net difference cash flow- $109.33/m

Over the 5 year term- $6559.80

Net closing balance at the end of 5 years:

2.39% - $317,057.75

1.79%- $313,104.46

Net difference to principal balance owed- $3953.29

Combined costs to Cash-back 

Net difference in you cash-flow- $6559.80 + Net difference to principal balance owed- $3953.29

Total cost to you to take the 3% offer- $10,513.09

Take that from the 3% cashback- $11263.20

Total cash net benefit of $750.11 and you get to have the money now.

Things to look out for in the near future: Co-ownership and how more people are looking at home-ownership as a share in a larger investment-- and you get to have some where to live too.

I hope this can help you help more people get into home ownership.  Please let me know if you know anyone I can help.  I would be my pleasure to do so. 

Thank you,

Roberto Pelaccia