Overview of Cash Back Mortgages in Canada
A cash back mortgage is a mortgage product where the lender offers the borrower a lump sum cash payment at closing, based on a percentage of the mortgage amount. This cash lump sum can help cover moving costs, closing fees, home renovations, or other expenses related to buying or refinancing a home. While the upfront cash can provide financial flexibility, it typically comes with higher interest rates and potential penalties if the mortgage is broken early.
How Cash Back Mortgages Work
- You borrow more than the purchase price of the home.
- The extra amount is given to you as a lump sum, usually between 1% and 7% of your mortgage principal.
- For example, with a $400,000 mortgage and 5% cash back, you receive $20,000 at closing, but your mortgage balance is actually $420,000.
- The cash can be used for anything, including closing costs, furniture, renovations, or paying down higher-interest debts.
- The interest rate on the entire mortgage amount (including the cash back portion) is usually higher than standard mortgages.
| Mortgage Amount | 1% Cash Back | 5% Cash Back | 7% Cash Back |
|---|
| $100,000 | $1,000 | $5,000 | $7,000 |
| $200,000 | $2,000 | $10,000 | $14,000 |
| $300,000 | $3,000 | $15,000 | $21,000 |
| $400,000 | $4,000 | $20,000 | $28,000 |
| $500,000 | $5,000 | $25,000 | $35,000 |
Benefits of Cash Back Mortgages
- Immediate cash relief for buyers who may be cash-strapped after covering down payment and closing costs.
- Helps first-time buyers with expenses like moving, furnishing, or renovations.
- Can be used for any purpose; no restrictions on how the cash back is spent.
- Available for both home purchases and refinancing in many cases.
Drawbacks and Considerations
- Higher mortgage interest rates across the entire loan amount, including the cash back portion, leading to higher long-term costs.
- Prepayment penalties: If you pay off or refinance early, you may need to repay the cash back amount on a prorated basis, plus penalties.
- Cash back mortgages are usually offered on fixed-rate terms, commonly 5 years.
- Not “free money” — the cash back is offset by increased costs over the mortgage term.
Where to Get Cash Back Mortgages in Canada
- Offered by major banks (Big Six) and credit unions.
- Mortgage brokers can help find lenders offering competitive cash back deals.
- Usually come with fixed-rate mortgages rather than variable rates.
Summary Table: Cash Back Mortgage Key Points
| Feature | Details |
|---|
| Cash Back Amount | 1% to 7% of mortgage principal |
| Use of Cash Back | Any purpose (closing costs, renovations, furniture) |
| Interest Rates | Higher than standard mortgages |
| Mortgage Terms | Mostly fixed 5-year terms |
| Penalties | Repayment of cash back + penalty if mortgage breaks early |
| Availability | Major banks, credit unions, mortgage brokers |
| Common Borrowers | First-time homebuyers, buyers needing extra cash flow |
Recommendations for Borrowers
- Evaluate if you truly need the upfront cash versus paying a standard mortgage with lower interest.
- Ask about the exact interest rate increase and penalties tied to cash back mortgages.
- Consider your likelihood of staying in the home for the full mortgage term to avoid penalties.
- Use cash back strategically for unavoidable expenses like moving or renovations.
- Work with a mortgage expert or use a platform like theratefinder to compare cash back mortgage offers and rates from top Canadian lenders. Start your personalized mortgage application at theratefinder.ca/onboarding.
Conclusion
A cash back mortgage can be a helpful financial tool for Canadian homebuyers—especially first-time buyers—who need extra cash to cover initial expenses. However, the convenience of upfront cash comes with higher interest costs and potential penalties. It’s crucial to carefully weigh these trade-offs and fully understand the terms before choosing this mortgage option. Consulting a mortgage expert and using comparison tools will help you find the best cash back mortgage tailored to your needs.