A cash back mortgage pays you back a percentage of the total loan as an incentive to complete and carry the mortgage with a lender. The cash back can be anywhere from 1% – 7% of your mortgage, depending on the size and term of your loan.
If you’re a first time home buyer shopping around for a mortgage lender, you may come across this term during your research, but how does someone qualify for getting money back on their mortgage? Who is a cash back mortgage good for? And can it be as beneficial as a traditional mortgage?
We’ve got answers to all these questions.
How does a cash back mortgage work?
At its simplest element, a cash back mortgage works by giving you money back upon the closing date of your mortgage.
You must carry the mortgage for a set amount of time, as laid out in your mortgage agreement. If you break that agreement at any point, you’re typically required to pay a penalty as well as to repay the cash you received at the start of your mortgage.
Terms can be of varying lengths and the cash back percentage varies from bank to bank. Typically, though, it’s offered at 1% – 7% of your loan, depending on the size of the mortgage and the length of the term. Other cash back mortgages base the amount of cash back you get on a sliding scale, depending on how large of a mortgage you plan to carry.
Who is eligible for a cash back mortgage?
While this type of mortgage is most beneficial for first-time home buyers, those refinancing or simply moving banks may be able to take advantage of this offer as well. If you’re looking to refinance or renew your mortgage and your current lender already offers a cash back mortgage, you may be out of luck. Switching to a mortgage lender that does offer cash back, though, is an option.
Typically, people who qualify for this special mortgage have a credit score above 650 and a low debt-to-income ratio.
Plus, those using their home as a rental property are not usually eligible through traditional lenders.
How do cash back mortgages compare to traditional mortgages?
So how do cash back mortgages stack up against traditional mortgages? Below is a list of pros and cons, comparing and contrasting the different terms.
| Mortgage type | Cash back mortgage | Traditional mortgage |
|---|---|---|
| Pros | * Cash in hand relatively quickly * Variable or fixed rates |
* Flexible terms * Competitive interest rates |
| Cons | * Often require higher interest rates * Common expectation that all your main accounts will shift over to the mortgage-holding institution |
* No cash back |
| For situations when: | * You need a small amount of cash back to fund a project, make a purchase for your new home, or pay off
a small debt * You’re switching your mortgage from your current financial institution and want your new bank to cover the transfer fees * You’re hoping to consolidate your banking into a one-stop shop, opening a chequing account so you can have your paycheques directly deposited, pay your bills, and have your credit card all through the same bank |
* You want the best, lowest interest rate on your mortgage possible * You need flexible terms, locking in your mortgage for under 5 years * You’re trying to keep your payroll deposits at a financial institution independent of where your mortgage is held |
Which banks offer a cash back mortgage in Canada?
Not all banks or lenders in Canada offer cash back mortgages. This type of mortgage is usually only offered by the big banks – credit unions and other lenders tend to shy away from these types of long-term cash back loans.
This table compares some of the most popular cash back mortgages in Canada.
| Bank | Terms available | Cash back offered | Details | Learn more |
|---|---|---|---|---|
| National Bank | * 4-year or longer * Variable or fixed-rate |
$1,000 – $3,000 | * Complete loan process within 90-days * Owner-occupied residential dwellings with 1 to 4 units |
Learn more |
| RBC | * 1 to 10-year closed, fixed-rate | 4% – 7% of value (max of $20,000) | * Must be a first ranking residential mortgage | Learn more |
| Simplii Financial | * 5-year fixed or variable rate | $750 – $3,000 | * Must be funded within 120-days * Have a Simplii chequing account for mortgage payments * $250 bonus is given with additional conditions |
Learn more |
| CIBC | * 5-year variable rate or 3+ year closed, fixed-rate | $1,000 – $3,000 | * Must be funded within 120-days * Use CIBC chequing account for payments |
Learn more |
| BMO | * 3-year or longer * Fixed or variable-rate * Closed term mortgage or Homeowner Readiline |
$1,100 – $4,200 | * Must be funded within 130-days * Use BMO chequing account for payments |
Learn more |
Breaking it down further, many of the cash back mortgages hit a ceiling at $3,000 or so. Beyond that, it’s worth examining why that ceiling is there and what type of mortgage qualifies for the maximum cash back.
All of these cash back mortgages require the mortgage principal to be $100,000 or more, and scale the cash back offer according to the property value.
3 benefits of a cash back mortgage
There are 3 main points that make cash back mortgages an attractive option. While these benefits might not be for everyone, they do apply to a large portion of home buyers.
1. Fast cash
In most cases, once you qualify for the cash back mortgage and the mortgage closes, the money is quickly deposited into your account.
This cash can be used for extra costs or purchases needed when moving into a new place.
2. Transfer fees can be covered
If switching your mortgage to a new bank with a cash back mortgage, a cash back mortgage essentially means that your lender is covering the associated transfer fees.
Depending on the size of your mortgage, it can add up to a nice chunk of change in your pocket.
3. Mortgage terms
Most places offer cash back on either variable or fixed interest rate mortgages. This is convenient as variable rates means you can take advantage of lower interest rates when available. Many buyers are currently choosing to do so.
There’s some flexibility here, but applicants usually need to hold their mortgage with the bank for a term of 4 to 5 years, depending on the lender.
2 downsides of a cash back mortgage
Lenders don’t usually give out cash without putting a few caveats in place. So, naturally, there are some drawbacks to a cash back mortgage – 2 in particular that are worth noting.
1. Potentially higher interest rate
When it comes to a cash back mortgage, interest rates are often higher than those of traditional mortgages.
This isn’t always the case, though. For example, the current special interest rates offered on the Simplii account are very much in line with a traditional mortgage rate. But that rate is only being offered for a limited time.
Like any mortgage, there are penalties for breaking your mortgage early. These terms differ from lender to lender, so be sure to read the fine print.
2. Other accounts are a condition of cash back
When you open your cash back mortgage with one of these lenders, it’s almost always a condition that you carry a chequing account with them. And you’re required to have your paycheques directly deposited into this account.
Each lender is different, but most require this.
As customers, it can be limiting to have your main chequing account associated with the institution where your mortgage is held. You may miss other offers with payroll deposits that can also offer cash back. But sometimes it’s worth the compromise.
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Remember that each person’s situation is different, so it’s good to shop around for mortgages to uncover terms and conditions that work for you.
Some people like to search out the lowest interest rates possible, while others prefer a cash back mortgage for the extra money that helps – ever so slightly – to offset what will likely be the most money they have ever borrowed.
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Are you considering a cash back mortgage?
Are you currently looking for a home?
Or maybe your current mortgage term is up and you’re thinking of getting a cash back mortgage this time…is the cash back worth the switch?
Have you had a cash back mortgage before? What was your experience?
We’d like to know! Drop us a line in the comments below.
FAQ
What is a cash back mortgage?
A cash back mortgage is an incentive offered by banks. Once your new mortgage closes, you receive a percentage or set amount of money back – as long as you carry the mortgage to its full term.
How does mortgage cash back work?
Cash back mortgages function in a rather simple, straightforward way. Homebuyers apply for a mortgage, are approved, and at closing (usually) they receive an amount of cash back from the lender. Details can vary, but this is typically how things work.
Which banks offer a cash back mortgage in Canada?
Most of the major banks offer cash back mortgages, although some offers are only for a limited time. At the moment, RBC, Simplii Financial, National Bank, CIBC, and BMO are some of the financial institutions offering cash back mortgages.
Should I get a cash back mortgage?
Whether or not you should get a cash back mortgage depends on your individual situation. If you’re unsure, consulting with a mortgage broker is a good way to get advice and make informed decisions.
What are the cons of a cash back mortgage?
Some potential drawbacks to a cash back mortgage are the interest rates – they’re often higher than traditional mortgages. While this isn’t always the case, be sure to negotiate a mortgage rate that has your best interests in mind.
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