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Orginally posted by ihpatel

As per my understanding cahback is
say for example mortgage amount 1 00 000 , I get 5% cash back is 5000 I get cash and this cash I can use to buy furniture etc... on RBC web site it says \"you can use this money You may even apply it as an immediate prepayment of your principal.\"

Now here it mean total principal I have to pay back is 105 000 and intrest on 1 00 000 ? and if I use this cash back as prepayment of principal then what happen it's a same thing .....

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Hi ihpatel,

The banks offer you cash back as a 'lolly pop' which looks good (read taste sweet) but turned out ot be costly (read bitter) in the long run. Why, because if you get cash back, you do not get the best discounted rates and end up getting posted rates which could mean paying in excess of hundreds of dollars in interest over the term of the mortgage.

Now this cash back can be used for any thing. You can get a cheque in your name, or adjust it towards your lawyers fee or CMHC mortgage insurance fee or simply put in towards down payment or pre-paying your mortgage principal immediately.

Here in the example you quoted, it would mean that if you take $100,000 for a 5 year term and get 5% cash back and put that $5000 towards your principal payment, your mortgage would start from $95,000 and you owe to the bank only $95,000 and you have to pay this amount back in 5 years with interest. However, if you do not put it back to the repayment of your principal and use it to buy furniture etc. your mortgage would be $100,000 AND NOT $105,000. This example is not taking CMHC premium in to consideration.

Generally on a mortgage of $100,000 you end up paying $1100 - $1500 extra in interest over 5 year period if you take a cash back of 5%. This means that you are paying an interest of anywhere between $1100 to $1500 on this borrowed amount of $5000 depending on the posted rates, discounted rates and whether you put this money back into mortgage repayment or utilize as you wish.

Similarly, if the mortgage amount is more (as you do not get any thing reasonable in $100,000) it would increase the cash back amount as well as the repayment amount over the term of the mortgage.