How Does a Cash Back Mortgage Work?
If you need a little extra money to help offset the costs that come with buying a house, a cash back mortgage might be worth looking into.
A cash back mortgage advances additional funds that can be used to cover things like closing costs, moving expenses or home improvements. Signing a cash back mortgage can help create some financial breathing room, but the cash in question isn’t free.
How a cash back mortgage works
A cash back mortgage involves taking out a loan worth more than what’s required to purchase a house and receiving the additional funds as a lump-sum payment upon closing.
The cash back component can be a dollar amount, like $5,000, or percentage-based, often between 1% and 7% of the principal.You can use the cash for whatever you want.
For example, if you get approved for a $400,000 mortgage and arrange to get 5% cash back ($20,000), you’ll receive the $20,000 as a single payment when your mortgage closes. Your resulting mortgage balance would be $420,000.
Mortgage Amount | 3% Cash Back | 5% Cash Back | 7% Cash Back |
|---|---|---|---|
$100,000 | $3,000 | $5,000 | $7,000 |
$200,000 | $6,000 | $10,000 | $14,000 |
$300,000 | $9,000 | $15,000 | $21,000 |
Where to get a cash back mortgage in Canada
Cash back mortgages are primarily available at financial institutions like Big Six banks or credit unions.
A mortgage broker can also help you find cash back mortgage offers among their pool of lending partners.
Cash back mortgage rates
While it’s handy to get extra cash after buying a house, cash back mortgages can charge significantly higher mortgage interest rates than standard mortgages.
The higher interest rate applies to the entire loan amount, not just the cash back you receive, so the additional interest charges could be considerable. Most lenders only offer cash back options on fixed-rate mortgages, although a small number also offer cash back on variable-rate mortgages.
Cash back mortgage penalties
With most mortgages, there are penalties for refinancing or breaking your mortgage term early. Break a cash back mortgage and you may have to pay back all of the cash you’ve been advanced — plus a prepayment penalty.
Penalties vary by lender, but they’re something to keep in mind if you’re contemplating a cash back mortgage. Ask plenty of questions so you understand your lender’s prepayment penalties before finalizing the mortgage.
Is a cash back mortgage a good idea?
Not always, but it can be a useful option if:
You want to finance closing costs, like land transfer taxes or legal fees.
The home you’re buying needs major repairs or renovations.
You need to furnish your new home.
You have to supplement your cash flow for the first couple of months after buying a home.
You need extra cash to cover the costs of moving.
You want to pay down high-interest debt or student loans.
Having a dedicated purpose for the money you’re being advanced makes it more likely that you’ll put it toward something that provides a return on your investment.
Pros and cons of cash back mortgages
A cash back mortgage can help you cover short-term expenses, but it still increases your overall mortgage balance. Here are the main pros and cons to weigh:
Pros
Access cash to cover additional homeownership expenses.
A single monthly mortgage payment covers your mortgage and cash back amount.
Wide availability allows you to comparison shop and find the right rate and terms for your financial situation.
Cons
Higher interest rates than a traditional mortgage.
May have stricter qualification requirements.
Penalties for changing or breaking the mortgage contract.
Cash back mortgages vs. cash bonuses
It’s important to understand that “cash back” and “cash bonus” are very different terms when it comes to mortgages.
A cash back mortgage is not a rebate from your lender. It’s just an extra loan that gets added to your mortgage. Any money you receive as part of a cash back mortgage needs to be repaid.
A cash bonus operates more like a reward or gift. An example of a cash bonus might be a promotion that pays cash, or a cash equivalent, for taking out a mortgage at a particular bank.
Whichever option you’re considering, carefully go over the terms and conditions with your mortgage advisor to ensure you make the right choice.
Frequently asked questions
What is a cash back mortgage?
What is a cash back mortgage?
A cash back mortgage allows you to borrow more than the amount required to pay for your home. The cash back portion is added to your mortgage balance and has to be paid back to your lender. It is not a bonus or discount.
What does 3% cash back mean on a mortgage?
What does 3% cash back mean on a mortgage?
A 3% cash back mortgage offer means you will receive 3% of your original mortgage amount as additional financing. If your mortgage is $200,000, 3% cash back would be $6,000.
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Clay Jarvis
Clay Jarvis
Clay Jarvis