Banks push cashbacks

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Brokers are feeling one last push by the banks to sell cashback mortgages before OSFI kicks it off their product lists.

“They know the product is going away and they want to fill up their pipe with as many of those deals as they can before they have to pull it,” Chad Robinson, president of Verico Best Interest Morgages, told “It’s still a hard sell for brokers, because of the rate.”

Earlier this month, The Office of the Superintendent of Financial Institutions confirmed that it will indeed move to scrub that hard-to-hawk offering from lineup of federally regulated lending institutions.

“With respect to the borrower’s down payment for both insured and uninsured mortgages, writes the regulator in its June 2012 guidelines update, “incentive and rebate payments (i.e., “cash back”) should not be considered part of the down payment.”

While early broker objections around those new rules focused on re-qualifying standards, few mortgage professionals have publically criticized the move to eliminate cashbacks.

That’s likely because of the same challenge Robinson points to: Rate.

“The demographic for the product is very small,” he said. “They have to have good credit (680 Beacon score) and a good job, but no down payment. That kind of client is more likely to be able to source the down payment through other means and they’re sensitive to the gap between the rate attached to cashbacks compared to prime rates.”



  • kevin J. Power, President Power Mortgages Inc on 2012-06-27 2:53:26 AM

    These cash back mortgages are a poor product in my opinion anyway. Since they have been around I have done one. I have lots of inquiries but when explained and given options to the clients, they walk away from the cash back idea.

  • James on 2012-06-27 2:58:29 AM

    Cash Back mortgages are an excellent niche broker product. Who wants to send their client back to their bank to get a loan for the down payment? Why aren't more brokers concerened about losing more market share?

  • Paul Therien, CENTUM on 2012-06-27 3:18:19 AM

    Cash back mortgages certainly do fill a niche, they assist the consumer in the purchase of a home that they necessarily could not afford because they do not have down payment. With the much higher rate, and the potential additional penalty, there really is no long term benefit of the product for the consumer.

    If a consumer wants to buy a home, and they do not have the down payment... then they should save their money to get a down payment. It is the way that the vast majority of home owners in Canada have done it for generations. It might be harder today than it was last year, but it is still pretty easy to own considering only having to put 5% down. How will the consumer maintain the home if they do not have the ability to save for a down payment? What if they need a new furnace, roof, etc? Are we in truth setting up the customer for failure by encouraging them into a home that they cannot afford? If they do not have the financial ability to save for a down payment how is it that we expect them to understand the fiduciary responsibilities that come with home ownership? Sure, we get a deal done today… but what about the future?

  • MortgageMan on 2012-06-27 3:19:33 AM

    I'm willing to bet the banks push these cash back mortgages much more than mortgage brokers do. That's because we're in business to educate the client and develop long term relationships, not just sell them a poor cashback product, for a quick buck. Just as Kevin Power stated in his post, most clients walk away from the product once they'

  • Terry on 2012-06-27 3:27:04 AM

    James makes a good comment in the sense that consumers banks are giving them loans for the down payment. In my mind, that should have been a no no in the first place. And, I am only saying this because of the rules that we Brokers have to follow on providing proof of a 90 day history. So, those clients laugh in our face when the very banks are able to simply tell them to come on down for the loan, and don't have to reveal the same 90 day history. The cash back is no more than the cost of that loan from the bank. And if you think all those cash backs that are not to be used for down payment, think again. The Brokers working under those banks get around it by using those Gift Letters.

  • David O'Gorman CPMB on 2012-06-27 4:52:39 AM

    I can not believe that any broker/agent in this business for the long run is selling this "product" if they are truly acting in their clients best interest.
    Take an average $300k first, subtract the difference between the posted rate charged on a cashback & the best rate you can get with 5% down, say 5.24% posted with 4% cashback & 3.29% discounted, no cashback. A 1.95% difference between the rates x $300k= $5850 difference in interest for 1 year, now x by 5 years= $29,250 more in interest for the cash back loan( it is really a difference of "only" $28,087.66 or $5,617.53/year when the loan is amortized).

    Now just simple math,4% of $300,000 =$12,000. $5617.53 divided by $12,000= 46.81% !!!!
    That cash back is costing the customer 46.81% every year for 5 years, and you think its a great product.Its even greater than credit card rates & approaching payday loan rates.
    When I teach mortgage finance courses for real estate registrants I use this example, mathematically correctly as an exercise on the calculator. The real estate people say why didn't my mortage "professional" explain that to me?
    If our associations did anything worthwhile to support the industry it would be to help get the message out to consumers the cashbacks are not a good product for anyone other than a lender.

  • James on 2012-06-27 4:53:35 AM

    Any predictions for the next rule change? I say the Feds wil no longer allow Gifted down payments. GDS/TDS to be 25%/35%.

  • Ben on 2012-06-27 5:32:22 AM

    The talk about the cashback program being a good or bad thing for clients has been around for a long time, like most if not all products out there it is not for everyone but keep in mind that a percentage of clients (no stats taken…) that currently own a home and upgrading to a bigger home and mortgage will gather the down payment from the equity earned on their current home (from paying it down with regular mortgage payments and increase in property value) and not from their own savings. By no means I’m I saying that one cannot save a down payment on top of their monthly bills but if I were to choose paying rent every month at $1,800/month vs getting a 4.99% cashback mortgage (approx. $533/100K/month) I would choose to start building equity now. Also if the cashback is soooo bad, why isn’t the gifted down payment also considered bad? Is it because the interest rate is lower? Because the client qualifying criteria’s are much less with a gifted down as they are with a cashback program…. Needless to say I am a BIG fan of this product and it is unfortunate we will no longer have it....David O'Gorman CPMB--- you talk about the interest but fail to mention that 100% of the client's rent is wasted. One of the cashback product that i sold a client in Canmore; ended up paying $100 less in mortgage payments per month then he was paying rent... is that not a good thing for him?

  • David O'Gorman on 2012-06-27 8:34:53 AM

    Values in Alberta are rising, now. But I am seeing people in the GTA who have bought entry level homes, with little down other than the cash back. Now if they need to sell they need to pay off the mortgage, they need to sell at a price high enough to pay the balance outstanding on the mortgage + the prepayment penalty + a prorated amount of the cash back + real estate commissions & HST + legals. Some values, in some areas aren't rising enough in the short term & we are in " interesting" times.
    I would love to see the "real" delinquency rates on cash backs. I would bet you a cold Alberta beer those delinquency rates are significantly higher , than other "real" 5% down .
    The Feds have to come up with a program only for true first time buyers that allows them to save & have skin in the game.

  • Derek Rowly on 2012-06-27 10:02:18 AM

    Good evening o all

    Lots of truth her to say th least. Personally I have never been a fan of "cash back". When I got my first home it was at 18% and 20% down - YIKES. There are both pros and cons but I believe the cons outweigh the pros.

    Having said this, a lot of what I am reading overall shows gloom and doom and it does not have to be that way. Regardless, I think we wold all be beter off if we adopted the attitdue of Angela Wong? of Invis. Now there is a lady who seems to control thgis environment rather than it controlling her. Onward and upeard to bigger and better.

    Continued good selling to all


  • bill jones on 2012-06-28 8:25:07 AM

    I don't a lot of cash-back mortgages but they definitely help out in some instances. Currently 4.99% with 5% cash-back is pretty good (don't forget that 5 years ago rates were 5.50%+ with NO cash-back). It can also help people avoid taking out their RRSP's with the first time buyers program which is really, when you think of it, 100% financing anyway as the RSSP's are just a "loan" to yourself (you gotta pay them back AND they stop working for you once they're cashed in). The NET effective rate of cash-back mortgages isn' that much higher than discounted rates with a 5% down down payment.

  • bill jones on 2012-06-28 9:19:29 AM

    David O'Gorman: "That cash back is costing the customer 46.81% every year for 5 years, and you think its a great product. Its even greater than credit card rates & approaching payday loan rates." - I really don't follow your math or reasoning (not to mention that as Ben said, the client would be shredding their rent money anyway). I also don't follow this: "...they need to sell at a price high enough to pay the balance outstanding on the mortgage + the prepayment penalty + a prorated amount of the cash back + real estate commissions & HST + legals". Not sure how the cash-bak is at fault here other than the pro-rated payback of the cash-back. The penatly may be a bit higher (if based on 3 months ineterest) BUT it could also be lower (significantly) as the cash-back rate was at (or close to) POSTED rate and therefore NO discount is used when calculating the IRD (unlike the 2% discount used when calculating some lenders IRD for discounted rates).

    I would think ALL factors through and double check your facts before you educate people and imply incompetence by using the word professional in "quotations".

  • Faye Drope on 2012-06-30 3:46:42 AM

    If you apply the cash back to the mortgage as the pre-payment option allows then keep the monthly payments at the initiated rate then you are far better off. It is only good in this instance as far as I am concerned.

  • Len Lane on 2012-06-30 4:21:14 AM

    Flex down strangely enough still sounds like it may exist when this is over. RBC this week offered one of my clients the 5% personal loan and then would give him the mortgage at the regular discounted rate.

  • It's Perspective!! on 2012-06-30 5:42:04 AM

    I'm honestly surprised the number of negative comments regarding this product. I've found it invaluable, and so have my clients. It's so easy to be judgemental and scoff at those that haven't saved a down. The calls I got for this are all young families, strapped by student loans, high rent, daycare etc. To "save" the down payment AFTER you've moved in is GREAT!! And guess what, those clients whom did so several years back have seen massive increases in their equity, while those tryin,(and failing) to save sit on the sidelines crying they can't save as fast as the prices were going up!! Guess what else - no sticker shock when rates go up, they're already paying the higher rate!! I'm banking the rate of defaults among the 5% down folks goes higher than the $0 down folks when the time comes!! And lets not forget, there are a miriad of benefits to owning beyond things like interest rate or equity!! So no, I don't agree at ALL with getting rid of it, in fact I think it's etrememly unfortunate and shows OSFI's lack of understanding of both the product and human nature, cause don't think for one second that ppl won't simply go back to underhanded tactics, like the Oklahoma or taking a personal loan and waiting a few months in order to achieve the same thing. Like prohibition, you're better off with it being legal and maintaining some semblence of control over it. It's all in the perspective!!

  • Check Your Math on 2012-07-10 11:43:17 PM

    David Gorman, a little concerned that you are teaching when you are spouting out incorrect Mortgage Math. Interest is semi-annual and is based on a declining value over 5 Years. You used a simple interest calculation in your example and assumed no principle balance reduction? Get it right before you commit to a communication like this. Fail

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