Cashback is Crazy

Or so it has been said. Not in my opinion and the way we utilize this oft' ignored mortgage feature that the big banks offer.

The reason so many frown upon the cashback mortgage is because of the way it is generally marketed. So many bankers offer it to first-time homebuyers as a means of paying for furniture and start-up expenses for a new home. Is this a terrible idea for the first-time homebuyer to use a cashback mortagage? Yes, 100% agreed! Don't use it for consumer items!!!!

Where it can be useful is for the real estate investor. The good news about cashback mortgages is that it puts cash in your pocket immediately. If you use that money to buy another asset such as dividend producing stocks (ie bank stock that spins off income in the form of dividends-remember always strive for income producing assets AND appreciable assets!) or if you use the cashback money for an RSP contribution, well then it is a remarkable means of gaining wealth and enhancing Net Worth.... quickly. And the tax benefit is tremendous.

That's the situation our partnership faces at this moment. This partnership hasn't been mentioned here before. I haven't included this partnership in any of the figures in our Net Worth blog. It is a few additional condos in London 50% partnership. Check out our situation:

1) Cashback mortgage on our smallest condo. This jumps the rate to 6.75% and we are locked in for 7 years. However the bank puts $4,130 in the bank account. Downside is we are locked in for 7 years at a high rate......BUT thats what we were always planning on doing anyways right, holding the properties for the LONG-TERM?

2) Cashback mortgage on our other slightly larger condo in the same building. This time the bank puts $6,230 in the bank account. Downside is we are locked in for 7 years at the same high rate OF 6.75%......BUT thats what we were always planning on doing anyways right, holding the properties for the LONG-TERM?

3) Cashback mortgage on the other final unit that has very little mortgage and thus a smaller cashback. This time (its smaller) the bank will put $1,680 in the bank account. Downside is we are locked in for 7 years at the same high rate OF 6.75%......BUT thats what we were always planning on doing anyways right, holding the properties for the LONG-TERM?

CONCLUSION: Adding up all the greenery & we get a total of $12,040 in the bank account. Thus, $6,020 each (partnership 50%).

The Good News: $6k each to invest it in RSPs or you pay down RSP loan, or pay down primary mortgage on personal residence. Whatever we want.

More Good News: Added up our expenses of condo fees, mortgage payments & property taxes and added up our partnership rental income. I've also added up the costs of the big loan payment that served at original down payment. The tenants pay for all of this each month, so in a way its all free.

Even More Good News: The longer we hold the property, the more it goes up in value over time.

Best News of All: The higher interest rate & higher interest cost is tax-deductible and the cashback income is tax-free (the government considers it the same as they would a 'gift card').

BAD NEWS: We can't sell the property before 7 years, or else we owe all this money back....but.....our plan all along was to hold the properties for the LONG-TERM right, so no worries?

MORE BAD NEWS: Our rate sucks, so that means the mortgage wont get paid down as quickly. However the property still goes up just the same in value so we should still make good money in the LONG-TERM.