Cash Back Mortgages

Is a Cashback Mortgage right for you?

With a Cash-back mortgage, the client receives a cash rebate on their mortgage at the time it closes. This rebate varies anywhere from 1% to 5% of the mortgage amount depending on the lender and length of mortgage term chosen.

The money from a Cash-back mortgage is especially useful for first-time buyers who need additional funds to purchase home improvement items like window coverings, carpet, appliances, or even furniture. First time buyers are the most frequent consumers of Cash-back mortgages in Canada. Some banks allow the Cash-back proceeds to be used towards the down payment.

It is important to remember that this rebate is never directly paid back to the lender. Instead, the lender increases the interest rate on the mortgage term to recoup their costs.

Pros to getting a Cash-back mortgage

• You have saved up enough money to purchase your home, but may be in need of funds after the mortgage closes. The Cash-back can act as a buffer to get you through the first few months of home-ownership.
• If you utilized the RRSP Home Buyers program to withdraw your down payment out of your RRSPs, you may require additional money for legal fees and moving expenses.
• If you received a gift from a family member to put toward your down payment and want some money in order to feel more comfortable taking on this new liability.

Downside of the Cash-Back mortgage

Simply put, a Cash-back mortgage usually costs you more in the end in interest and lenders never offer their best rates on a Cash-back mortgage.

For example, a 3% Cash-Back on your $100,000 home purchase would give you a rebate of $2,943 and would cost you $4,252 in interest over the mortgage term. Not exactly inexpensive financing, but a Cash-back mortgage can be well worth it if you are unable to afford basic necessities after you put a down payment on your new home.

Additional Cash-back Mortgage Facts

A common misperception is that Cash-back mortgages may only be used for home purchases. However, they can also be used with refinances or on revenue property purchases.

Take note that very few lenders provide Cash-back mortgages on variable interest rate mortgages. Other things to keep in mind with regard to most Cash-back offers:

i) The Cash-back will be owed back (on a prorated basis) to the lender if you decide to pay off your mortgage, transfer it, or make a significant change to it within the first term of the mortgage (typically the first 5 years).
ii) The remaining prorated Cash-back amount could also be charged back to the seller of a home if he offers his mortgage up for assumption.