RBC: Cash Back Mortgage

Available on a Variety of TermsCashback is available on fixed rate mortgages with terms of 4, 5 or 7 years. And the amount of money you receive is based on the size and term of your

mortgage - up to 7% of its value.

Source: http://www.rbcroyalbank.com/RBC:RCn5mo71A8QAAypuvLU/products/mortgages/cashback.html

RBC: Cash Back Mortgage

Cash back Mortgage• $100,000• 5 year term• 25 year amortization• 1% cash back on

drawdown date• 7% APR

Conventional Mortgage• $100,000• 5 year term• 25 year amortization• 0 cash back on

drawdown date• 6% APR

Assumptions

RBC: Cash Back Mortgage• To analyze this, we first calculate the correct monthly

interest rate for each type (cash back & conventional)

7 2

2 2 /

2 7.1225%

12 2 /

2 6.90%

12 0.5750% /

:

nd Nom

nd P Y

nd Eff

Cashback Monthly Interest Rat

nd P Y

nd Nom

store Y

e

as I

6 2

2 2 /

2 6.09%

12 2 /

2 5.9263%

12 0.

:

4939% /

nd Nom

nd P Y

nd E

Conventional Monthly Interest R

ff

nd P Y

nd Nom

store

ate

as I Y

All calculations are shown using keystrokes for the HP 10B calculator

RBC: Cash Back Mortgage

1 2nd P/Y (1 Pay/Year)

100,000 PV

0 FV

25 x 12 = N

0.5750 I

PMT $700.42

1 2nd P/Y (1 Pay/Year)

100,000 PV

0 FV

25 x 12 = N

0.4939 I

PMT $639.81

Now calculate the monthly payments for each alternative:

Cash back Mortgage Conventional Mortgage

RBC: Cash Back MortgageNow calculate the balance outstanding at the end of the five year fixed rate term for each type of mortgage:

First calculate the payment, then:

60 Input

2nd Amort

=

=

= $91,044.59

First calculate the payment, then:

60 Input

2nd Amort

=

=

= $89,836.71

Cash back Mortgage Conventional Mortgage

RBC: Cash Back MortgageWe can now calculate the implicit interest rate charged by the bank

for the cash back option.

1. Calculate the difference in monthly payments

2. Calculate the difference in balance outstanding at the end of the five year fixed term

3. Calculate the implicit interest rate

1 2nd P/Y (1 Pay/Year)

1,000 PV

1,207.88 +/- FV

60.61 +/- PMT

60 N

I -?