Jumbo mortgages are extra-large mortgages that are sometimes offered to people who want to buy larger properties than they can realistically afford.
They are the result of creative mathematics on the part of those lenders who are willing to lend vast sums to people who don’t necessarily qualify for the size of the loan.
Similarly, cash back mortgages may seem like manna from heaven to those consumers who are would like to move up the real estate ladder but who don’t have the savings required to fund the size of down payment required.
In theory, cash-back mortgages are supposed to be used to cover up-front charges such as lawyers’ fees, closing and moving costs, land transfer taxes, and other mortgage related fees and expenses.
However, in practice, these fees and expenses add up to around 5% of the total mortgage cost – which ‘coincidentally’ is just the amount needed to make the down payment on the property. And after all, once the mortgage is signed and the money is banked, who is to know what the cash-back mortgage was really spent on anyway?
Dream come true or your worst nightmare?
Jumbo and cash-back mortgages may both seem like a dream come true to those who are looking to invest in real estate and have their eyes set on a property that may perhaps be a little beyond their means.
We would all like to buy the magazine-perfect home and live to the full those luxurious life styles that we see portrayed all too frequently on our TV screens and social media.
But problems can quickly arise when property prices fall or interest rates are hiked – leaving cash-strapped consumers with homes that they have to sell for less than they paid, or crippling mortgage bills that they are unable to meet.
Let’s face it – we have all seen what happened in the US in recent years where far too many people took out loans they could ill afford to buy properties that cost more than they were truly worth.
Right now in Canada it is a sellers’ market with property prices soaring in many prime locations. For example, homes in Toronto are up between 11-13% compared with a year ago with an average single family home costing around $945,000.
This is a moment for serious buyers to keep their feet firmly planted on the ground and do the math before you buy. Some current 5% cash-back mortgages on a $400,000 property will give you $20,000 to use up-front but could cost you 4.99% in interest charges – which adds up to some $93,423 in interest over a five year period.
Compare this to the $55,288 you would pay if you had instead taken out a discount mortgage at just 2.99%. This is a difference of almost $40,000 or double what you would have been advanced on a cash–back mortgage.
Buyers need to think if it is really worth taking on the extra debt load? Would it not be wiser instead to look for a property where the down-payment is more affordable to you and the interest rates and monthly payments are well within your means?
Right now in Canada, given the increasing gap between wages and housing prices, it is important to be fully informed about state of the real estate market and to get the best advice you can about how much you can realistically pay in monthly mortgage bills for your new home and still afford to live comfortably and sleep easy at night.
For down-to-earth, buyer-friendly advice from one of Montreal’s most effective mortgage brokers please contact Best Mortgage Montreal by telephoning 1-855-777-1711, 1-514-994-1030 or 1-514-819-9181, or filling in our easy-to-use online form.
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