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90% Insured Refinances Live…Sort Of

RefinanceLast month the government abandoned its support for refinances above 85% loan-to-value. (See: New Mortgage Rules)

That’s made life harder for people with circumstances that require greater access to their equity.

A few uninsured lenders will still permit refinances up to 90% LTV, but the rates are steep.

A much lower-cost option is one that may not be intuitive—a cash-back mortgage. Cash-back mortgages make near-90% LTV refinances possible, and cost less than some might think.

National Bank, for example, has a five-year 5.5% cash-back mortgage promotion. It’s available through brokers and branches. The current fixed rate is 5.34%, which sounds high, until you do a few calculations.

National-Bank-MortgageThe effective rate of National Bank’s cash-back mortgage is actually far lower than 5.34%. That’s because the borrower gets $5,500 cash for every $100,000 of mortgage, which directly offsets a portion of the interest cost.

According to National Bank, “The exact effective rate would be 3.965%” with a 25-year amortization.

That’s a respectable rate given that:

  • Regular discounted 5-year fixed rates are only 15-20 basis points lower (mind you, you can’t get those lower rates on a refinance above 85% LTV)
  • A cash-back mortgage saves you the additional insurance premium that would have previously been charged on refinances to 90% LTV. Those extra premiums used to be:
    • 1/4% of the entire mortgage amount; or,
    • 3/4% of the new money—for refinances of already-insured mortgages.

firstlineOther lenders have cash back mortgages too. As of today, status brokers at FirstLine, for example, can obtain 5% cash back on mortgages closing in 30 days. FirstLine includes 1/2% less cash back than National Bank, but the rate is slightly lower (5.09%) and the clawback is less.

“Clawback” refers to the cash that the lender makes you pay back if you break the mortgage early. If you discharge your mortgage after two years, for example, a lender will make you return 60% of the cash back you received, or more.

Clawbacks are serious business; so if there’s any possibility you’ll break your mortgage before 4-5 years, the math on a cash-back mortgage won’t be as good.

That said, if you move, you may be able to port your cash-back mortgage to the new property—with no clawback or penalty.

To get a cash-back mortgage you need decent credit. That usually means a Beacon score of 650 or greater. Depending on the rest of your application, however, it’s possible to get approved with a Beacon as low as a 600.

Among other things, lenders will also want to ensure your debt ratios are reasonable and your income/employment is solid.

All in all, cash-back mortgages can be a cost-effective solution for those who need ~90% financing and have no better options.

Sidebar: Cashback mortgages are also available on purchases, providing near-100% financing. If you don’t have a down payment, however, you’re probably better off renting. We generally advise folks to avoid cash-back down payment mortgages unless they absolutely must buy now, will be in their home over 5 years, have a source of liquidity (for emergencies) and expect significant income growth.

Rob McLister, CMT