What is a Cash Back Mortgage?

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 cash back 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 cash back mortgages will advance you a lump sum of money when your mortgage closes. This can be used to cover closing costs, help furnish or renovate your new place, or however you choose. With the exception of down payment having to come from your own resources, there is no rule dictating how the cash back money must be used. 

Cash back 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 cash back mortgage. The most common amount is 5% of the mortgage, but some lenders may provide anywhere between 1% and 7% as a cash back option. 

Key Takeaways

• Cash back 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 cash back mortgage amount is 5% of the mortgage, but some lenders may provide anywhere between 1% and 7% as a cash back option.
• Expect to pay a higher interest rate on your mortgage with a cash back program – as much as the lender’s posted rate vs discounted rate

Tip: In addition to when you’re purchasing a property, you may even be eligible for a cash back mortgage while refinancing an existing mortgage.

Who offers cash back mortgages?

You’re most likely to be able to secure a cash back mortgage through a bank or credit union. There are a number of providers, which gives 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 cash back mortgage?

Although cash back 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 cash back mortgage early? below.)

Most important, you should expect to pay a higher interest rate on your mortgage with a cash back 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 cash back 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: Cash back 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 cash back at closing.

When is a cash back mortgage a good idea?

A cash back mortgage can be extremely beneficial if you require some extra cashflow 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 help make the transition easier.

Another way a cash back 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: Cash back 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 cash back mortgage early?

If you have a cash back mortgage and choose to break it early for any reason, you’ll face a claw back on some or all of your cash back advance. So, in this instance, not only will you have to pay back the cash back 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 cash back option that you’re going to stick with it throughout the term.

Other articles in this guide: “How to Choose a Mortgage Rate“

• Mortgage Terms in Canada
• Should I get a Fixed or Variable Mortgage Rate?
• Mortgage Prepayment
• Porting and Assuming Home Loans in Canada
• Skipping a Mortgage Payment
• Prime Interest Rate in Canada
• What is a Collateral Charge Mortgage