What’s a Cash Back Mortgage?

Atrina Kouroshnia
October 7, 2014

Buying a home is expensive, and often buyers need extra money to cover renovations and furniture or to pay down higher interest debt. One solution is a cash back mortgage, where you receive a lump sum cash rebate at closing to use however you choose. Depending on your lender, this tax-free rebate can range from 1 to 7 per cent of your total mortgage, although 5 per cent is fairly common. In a few cases, the rebate can be used towards your down payment.

Who Offers Cash Back Mortgages?

Not all lenders offer cash back mortgages and those who do offer various rebate amounts.

Here’s a look at options offered by several Canadian lenders:

Lenders

Amount of cash back

First National

5 per cent

RMG

1-3 per cent depending on the rate chosen

TD

5 per cent

National Bank

1-8 per cent depending on the term chosen

Vancity - BC only

1-2.5 per cent depending on the term chosen

Meridian - Ontario only

Standard cash bonus is 3 per cent but also offer 5 per cent cash bonus for down payment

In general, you’d need to have a credit score of 680 or above and the property would need to be owner-occupied in order to qualify for a cash back mortgage.

What Does a Cash Back Mortgage Cost?

Cash back mortgages carry a higher fixed interest rate than regular mortgages and they will increase your mortgage’s principal, resulting in more interest paid at a higher rate. If you don’t truly need the cash, you’re often better off with a regular mortgage.

For instance, say you were borrowing $450,000 with a five-year term. Assuming you had good credit and a reasonable debt-to-income ratio, you might qualify for an interest rate of 2.89 per cent with a regular mortgage (over the five years, you’d pay $60,070.87 in interest). That same lender might offer you a cash back mortgage at a rate of 3.34 per cent (over that same period, you’d pay $73,123.29 in interest). If you were getting a rebate of 1 per cent on the $450,000, you would receive a lump sum cash payment of $22,500, raising your principal to $472,500. With the higher interest rate, not only would you need to repay the original $22,500, but you would also have to pay an additional $13,000 in interest over the five-year term,

It is also important to consider that if you break a cash back mortgage early or decide to refinance, you may need to repay the rebate in full at that time, depending on your lender.

What If I Already Have a Mortgage?

For homeowners who already have a mortgage and want to access the equity in their home, cash out refinance (where you refinance your mortgage and get cash out) or a home equity line of credit (HELOC) may be something to consider. But, with regular refinancing, you would need to retain at least 20 per cent equity and a HELOC generally requires that you retain at least 35 per cent equity, so if you’re below those thresholds, these options may not apply to you.

Atrina Kouroshnia
Atrina Kouroshnia is an independent, licensed mortgage broker in British Columbia (see her website lavarates.ca). She specializes in helping first time home buyers own their first home and invest in their future. She has a degree in Human Relations and Commerce, and past work experience in human resources and real estate development have provided her with solid problem solving and customer service skills.