Mortgage Basics

What is a Cashback Mortgage?

What is a Cashback Mortgage?
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  • nesto
| Nov 2, 2020
Reviewed, May 7, 2024
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    If you’re ready to buy a home but you’re finding that you’re cutting it close to your budget with all of the closing costs adding up on top of the down payment you’re required to make to secure the deal, some lenders offer a cashback mortgage that may prove beneficial. But it’s important to do your research on both the pros and cons of this mortgage solution.

    Lenders that offer cashback mortgages advance you a lump sum of money when your mortgage closes. This money can be used to cover closing costs, help furnish or renovate your new place, or whatever you choose. With the exception of the downpayment having to come from your own resources, there is no rule dictating how the cashback money must be used. 

    Cashback amounts vary from lender to lender, but a predetermined percentage of the property’s value becomes eligible as a rebate at closing. This means that the larger your mortgage amount, the more money you can receive via a cashback mortgage. The most common amount is 5% of the mortgage, but some lenders may provide anywhere between 1% and 7% as a cashback option. 


    Key Takeaways

    • Cashback mortgages advance you a lump sum of money when your mortgage closes, which can be used for anything but the down payment, including closing costs, furnishings or renovations
    • The most common cashback mortgage amount is 5% of the mortgage, but some lenders may provide anywhere between 1% and 7% as a cashback option.
    • Expect to pay a higher interest rate on your mortgage with a cashback program – as much as the lender’s posted rate vs discounted rate

    Tip: In addition to purchasing a property, you may also be eligible for a cashback mortgage while refinancing an existing mortgage.

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    Who offers cashback mortgages?

    You’re most likely to be able to secure a cashback mortgage through a bank or credit union. There are a number of providers that give you multiple options. And more choice is always a good thing, especially when it comes to your mortgage.

    What is the true cost of a cashback mortgage?

    Although cashback mortgage options can prove beneficial for many homebuyers, particularly first-time homebuyers, there are some important things to keep in mind that will cost you more money throughout your mortgage – and especially if you choose to break your mortgage early. (See: What happens if I break my cashback mortgage early? below.)

    Most importantly, you should expect to pay a higher interest rate on your mortgage with a cashback program – paying as much as the lender’s posted rate vs discounted rate, although some lenders will just boost the rate 1-2% higher than the discounted rate. Regardless of how it’s calculated, however, a higher rate will result in a significantly larger amount of interest payments over the term of your mortgage. It’s this added interest that’s paying for the cashback you received at closing. Lenders will always be sure to make their money back and then some. They only lend money in such a way that will turn a solid profit for them.✋

    Important: Cashback options are only available through fixed-rate mortgages, so if you’re a fan of variable rates, you’re out of luck if you also want to receive cashback at closing.

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    When is a cashback mortgage a good idea?

    A cashback mortgage can be extremely beneficial if you require some extra cash flow to get you into your new home. After all, buying a home includes lots of extras, such as home inspection fees, lawyer bills, moving expenses and so on. 

    Sometimes, all a homebuyer—and especially a first-time homebuyer—needs is a bit of cash to make the transition easier.

    Another way a cashback mortgage can come in handy is by helping you pay down debt so that you’re minimizing your monthly obligations before adding a mortgage payment to the mix.✋

    Important: Cashback mortgages aren’t available unless you have a strong credit rating. Any blemishes in your credit history will make you ineligible for this product.

    What happens if I break my cashback mortgage early?

    If you have a cashback mortgage and choose to break it early for any reason, you’ll face a clawback on some or all of your cashback advances. So, in this instance, not only will you have to pay back the cashback money you received at closing, plus regular early payout penalties associated with exiting your mortgage term prematurely, but you’ll also have paid higher interest rates throughout the term of your mortgage before you broke the deal. 

    This can prove quite costly, so be sure before you select a cashback option that you’re going to stick with it throughout the term.

    Why choose nesto

    At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

    nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

    Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.


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