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Rob McLister: I have seen mortgage cashback gimmicks in the past, but this one is more interesting
Published May 24, 2024 • Last updated 3 hours ago • 5 minutes reading
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Wealthsimple is causing a stir with its “Cash” account – it offers up to five percent interest, a miracle for a checking account. Photo by THE CANADIAN PRESS/Jesse Johnston
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How would it be if you got back two-thirds of the interest on your mortgage?
Here's a quick way: Simply deposit $5 million into an account at Wealthsimple Inc.
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For the average Canadian, this may sound as tempting as a swim in Lake Ontario in January, but stay tuned.
Wealthsimple and Pine Mortgage have partnered to offer online mortgages. Until June 30th, they have an offer where they will refund a portion of your mortgage payments depending on the amount of your investment.
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I've seen mortgage cashback gimmicks in the past, but this one is more interesting. Unlike other lenders' rebate offers, Wealthsimple's calculator makes it easy to estimate the savings – and they offer compelling savings options.
Of course, not everyone has $5 million lying between their couch cushions. And most people wouldn't want to trust Wealthsimple with that much money even if they did.
However, the average mortgage borrower might still be interested in this deal for two reasons.
First, interest rates are solid – especially on mortgages with default insurance. Take, for example, today's fixed rate on a five-year mortgage of 4.79 percent. It's 20 basis points higher than the lowest mortgage rate offered by a national lender, but the discounts can dramatically reduce the effective interest rate if you invest enough.
For example, if you transfer $650,000 to Wealthsimple, you will receive a 0.80% discount. This means your payment will equate to an interest rate of only 3.99%.
“You leave all your money in the bank, but they don't really reward you,” says Justin Herlick, CEO and co-founder of Pine Mortgage. “Now there's a company that rewards you for bringing your money to them.”
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You can use the discounts to speed up the repayment of your mortgage loan, or simply spend the money and reinvest it elsewhere.
Second, Wealthsimple is making waves with its “Cash” account – it offers up to five percent interest, a miracle for a checking account. There are also no fees, no overdraft fees, free Interac and bill payments, no foreign transaction fees, a debit Mastercard with one percent cash back, and an automatic sweep feature to invest incoming funds immediately.
Given how easy it is to transfer money online, Wealthsimple could amass billions of dollars in deposits with this account, but it's not perfect. The Cash account lets you write checks but doesn't let you deposit checks or cash, though Wealthsimple is working on a solution.
And in case you're curious, Wealthsimple is not a bank. Instead, it has partnered with several Schedule 1 banks to hold cash deposits in trust. It spreads client funds across multiple banks to achieve deposit protection of up to $500,000. It also offers CIPF coverage of up to $1 million for investments.
Wealthsimple Mortgage Pros
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A low interest rate can be meaningless if the terms of the contract force you into a straitjacket. Wealthsimple/Pine mortgages are mostly standard, with a few notable caveats. Here's what you get:
- The interest rates are completely transparent, unlike certain large lenders that I am not mentioning here that have large office towers in Toronto;
- You can prepay up to 20 percent of your mortgage each year without penalty;
- You can transfer the mortgage to a new property to avoid penalties (you have up to 60 days to do the transfer);
- You can increase the mortgage without penalty if you move to a more expensive property; and
- If you pay off a fixed-rate mortgage early, Wealthsimple/Pine charges a lower penalty than the major banks.
Disadvantages of a Wealthsimple mortgage
Borrowers will not like this very much.
First of all, the discount is unnecessarily confusing. “It's not a traditional rate reduction; the contract interest rate and payment remain the same,” explains Simon Lejeune, vice president of growth at Wealthsimple. “We calculate what the payment would be at the discounted rate and refund the customer monthly for the difference.”
In other words, when they say you're getting a “0.15 percent” discount, that's a payment discount. The corresponding interest savings are less. It's more like you're getting 0.10 percent off the mortgage rate — still decent, mind you, but they could have made that a hell of a lot simpler and more intuitive by using real interest rate discounts.
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Second, Wealthsimple's mortgages lack some extras found elsewhere. Certain restrictions may be a deal breaker for some borrowers:
- You can't convert an insured mortgage to an uninsured mortgage. So, for example, if you take out an insured mortgage and then buy a home for more than $1 million, the mortgage is non-transferable and you'll pay a prepayment penalty. Most major lenders don't impose this restriction, which depends on how Pine finances its mortgages.
- If you need to refinance before maturity, unfortunately you cannot do so without penalty. Many lenders allow you to add new loans to your mortgage without penalty.
- If you need a bridge loan for the down payment because the sale of your old house is not yet complete, you're out of luck (most conventional lenders offer bridge loans).
It is worth noting that Wealthsimple offers two discounts, a “customer discount” of up to 0.15 percent and an unlimited “deposit discount” (until June 30). This corresponds to 0.05 percent for every 50,000 US dollars deposit with them. When you withdraw your money, the “Customer Discount” will remain, but the “Deposit Discount” will no longer apply.
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In total
If you're looking for a high-yield place to keep your money, need a mortgage, and can handle the limitations mentioned, Wealthsimple is worth a look.
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Of course, you still want to shop around and compare the effective interest rate after discounts with what you can get elsewhere.
Whichever way you look at it, Wealthsimple/Pine's new offering puts pressure on the big banks, who are guaranteed to lose (some) assets to the company. And that's a win for consumers. In Canada's tightly knit banking oligopoly, a restructuring of mortgage and deposit competition is always a refreshing change.
Robert McLister is a mortgage strategist, interest rate analyst and publisher of MortgageLogic.com. You can follow him on X at @RobMcLister.
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