Clay Jarvis
Beth Buczynski
If you need a quick infusion of money to help pay the many 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 one can help create some financial breathing room, but the cash in question isn’t free.
How does a cash back mortgage work?
A cash back mortgage involves taking out a loan worth more than what’s required to purchase a house. The excess can be a dollar amount, like $5,000, or percentage-based, often between 1% and 7% of the principal. It is provided to you as a lump sum when your mortgage closes. You can use the cash for whatever you want.
| 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 |
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.
» MORE: How mortgages work in Canada
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 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.
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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.
Alternatives to a cash back mortgage
If a cash back mortgage doesn’t feel like the right way to increase your cash flow after buying a home, there are other financing options to consider, including:
- A second mortgage like a home equity loan, which can turn equity into cash once you own the home.
- Personal loans, which are generally easy to find. If your credit score is strong, you could be offered a decent rate.
- A line of credit, which can be a more flexible financing option than a personal loan while offering better interest rates.
- Borrowing from your retirement savings using the Home Buyers Plan. You can borrow up to $35,000 from your Registered Retirement Savings Plan (RRSP) to help with the down payment and other closing expenses.
- A credit card, particularly a low-interest or no-fee credit card, which can give you the flexibility to cover moving costs or furniture purchases, and pay for them over time if needed. Be sure you wait until after your mortgage closes to apply, however, to avoid fluctuations on your credit report that might disrupt the process.
Frequently asked questions about cash back mortgages
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.
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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