Banks to End Cashback Down Payments

Cash-back-mortgageCashback down payment mortgages are on the endangered list.

One of the biggest remaining lenders with a cashback down payment mortgage is Scotiabank, which announced today that it is terminating its “Free Down Payment” program, effective September 15.

A source at the bank confirms that it is scrapping the offer in light of banking regulator OSFI’s B-20 Underwriting Guidelines.

OSFI has decreed that “Cashback should not be considered part of the down payment.” Most Federally regulated lenders must therefore eliminate these offerings no later than October 31, 2012.

Cashback mortgages – essentially 100% financing – are a niche product that are seldom appropriate for owner-occupied purchases (sometimes they make sense for rentals). There are exceptions, but most of the folks who want them are simply a bit too eager to buy.

The Canadian Association of Accredited Mortgage Professionals (CAAMP) supports OSFI’s call to end cash back products in lieu of 5% down payments. “Borrowers should have ‘skin in the game’,” it says.

There aren’t many federally-regulated lenders with 5% cashback down payment mortgages left. Last time we checked, National Bank and B2B Bank were two of the banks still doing them. Those options likely won’t be around for long.

Despite the above, banks (including Scotiabank) will continue selling cashback mortgages so long as the funds aren’t being used as equity. Buyers sometimes use cash back for things like land transfer tax, lawyer’s fees, moving costs, closing costs, furnishings, landscaping, renovations, and so on.

Cashbacks are also used for refinances to 85% loan-to-value (the official refinance limit without cash back is 80% LTV on insured mortgages).


Sidebar: There’s a chance that a small number of provincially regulated lenders will continue offering cashback down payment mortgages. We’ll see who’s left standing after October 31.


Rob McLister, CMT

  1. Zero down payment programs were expensive and did not make much sense from financial perspective. If they are pulled back then only a very small fraction of borrowers will get effected. It is a right step in right direction – in my opinion.

  2. I believe cashback mortgages where a good option for those borrowers who had good credit history and job stability. My mortgage practice is in Guelph (a university town) and many of the cashback mortgages that we did where for grads who did a good job at paying down their student loans, but didn’t have a chance to save!
    BTW, did you hear that MCAP will be lowering it’s LTV on secured-lines-of-credit? Check out the commentary at http://www.sandralastovic.blogspot.com

  3. In most cases, you have to pay more interest over the original term of your mortgage with a cash back mortgage as lenders penalize with a higher rate…
    At the end of the day, it was actually more lucrative for the bank to give you 5% cash back and charge you a rate that’s 1% – 2% higher than you could have gotten had you had your own downpayment. This, to me, says that people having to resort to this for an owner occupied property probably can’t afford the property in the first place.
    However, cash back mortgages can make sense for a refinancing in some cases… I was locked in a 3 yr 3.85% mortgage and I had 2 years remaining. CIBC took my $400K mortgage and gave me 4% back ($16K) which covered my $7K IRD and got a 3.55% rate for 3 years. I put the free $9K back into the mortgage and I saved interest every month with a lower rate and I only had to extend the term 1 year… So this goes to show you that in some cases, they can make sense.

  4. If all options are explored, with pros and cons of the cash-back, and home owners take the product with eyes wide open, you cannot generalize that it is a foolish product to use. Use is situation specific. There are many examples of borrowers using cash-backs for wise financial decisions. I have clients who have used it to purchase their first home for $250,000. That home is now worth $500,000. In their case, continuing to rent, attempting to save the required down payment, would have been the more foolish option.

  5. “I have clients who have used it to purchase their first home for $250,000. That home is now worth $500,000.”
    That was then. Anyone who expects home prices to double again in the next 10 years needs their head examined. God forbid if prices go down. Which option is more foolish then? Rent and save or buy and get skewered?

  6. People should enter into home ownership with a time horizon of at least 25 years. Not necessarily the same home, mind you.
    The bears seem obsessed with timing the real estate market as if it were akin to day-trading.
    On the other hand, many Canadians, like myself, bought their first home over 20 years ago and are now living mortgage-free, while sitting on a fat pile of tax-free capital gains. Feels great!
    Potential first-time homeowners need to plan for where home prices will be not in 10 years, but 25-40 years from now?
    Can it be done today? Of course it can. Living in fear is not really living at all.

  7. excellent gameplan…if you plan on living in the same house for the next 25-40 years. i fail to see your logic. how does someone trade up, down or sideways when their house has depreciated in value 5 yrs from now?
    and what does owing a home have to do with living a full life?

  8. A 25 year timeframe is totally irrelevant. Cash back customers are generally young people who stay in their first home maybe 3-4 years on average. If prices slip and you don’t have the equity to pay off your mortgage, you’re screwed.
    Remember that a 5% cashback mortgage is 102.6% financing, including the insurance premium. You are underwater right off the bat. Risky housing market or not, advocating negative equity is ALWAYS a bad idea.

  9. @ Bare Mountain:
    So, you need “equity” to pay off your mortgage? That’s news to me.
    I thought you just needed to maintain your mortgage payments until it was paid off.
    But what do I know, I paid mine off over ten years ago, and for eight years during the late 1980’s / early 1990’s I was in negative equity.
    Like I said, home ownership is for the long term.

  10. A person would normally be better off getting there 5% down payment from a line of credit and getting the best available rate rather than a cashback mortgage rate.

  11. “Situation-specific” is bang on! It was an ideal solution for a small fraction of my clients.
    Wayne Campbell,
    Invis-Prince George

  12. There have been good points made on both sides of this debate.
    Let me say this as a mortgage broker from a pure business standpoint.
    Every product withdrawn is bad. Every lender that closes is a bad thing.
    Every tightening of a lending rule is bad news.
    It may all be good for the long term health and stability of our real estate markets and our credit system; but for the day to day business of closing more mortgage deals: all bad.

  13. So Ron, what I am hearing from you is this:
    What is bad for you (the broker) is bad;
    What may be good (or bad) for the consumer AND the housing market AND the Canadian financial system (which you called “our credit system”) who cares?
    In other words, anything that interferes with YOU (the Broker) earning your next commission is a bad thing, regardless of whether or not it is in the best interest of the rest of Canada. Is this really what you just said?
    If this is really the mindset of the majority of Mortgage Brokers, it makes me wonder why 1 in 4 Canadians (27% according to CAAMP’s 2012 survey) would want to deal with brokers?

  14. Those 1 in 4 Canadians want choice. That is partly why they choose brokers. Unfortunately Flaherty has taken away choice and I agree with Ron. That is generally bad. It may save a minority of irresponsible borrowers from themselves, but it also hurts the majority who have the sense to make the right decisions, but who may need a flexible mortgage for a specific scenario.

  15. Through my lender I can do 5% cashback at 4.29%… but they are not allowing it before closing anymore for downpayment… so you would need to get it from another temp source… it gets paid 5 business days after completion…

  16. Had it not been for cashback I would have not got my property… It is 2 years now since I bought the property. I am happy I took the decision to buy the property…The equity released now after paying all the expenses is 40K!..
    I have a stable job with income of 132K per year with a bank and I am now selling off my property to move to a bigger place and away from the grid lock of the city.. I did not see anything wrong with cashback… Just because I came back to the country and beeen away for 15 years it was a challenge to come up with the downpayment.. Yes I lost a lot of money investing in the middle east property market so I had nothing in my pocket except a good paying job….Thanks to National bank for being there for me…

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