Everything You Need to Know about Cash Back Mortgages in Canada
What Is a Cash Back Mortgage?
Purchasing a home is a major expense. After saving up for a down payment you may realize that there isn’t enough money left over to help with closing costs, pay for renovations, furniture, landscaping etc. That’s where a cash back mortgage comes in. Many lenders offer a cash back rebate when you take out a mortgage.
With a cash back mortgage, a lender gives you a lump sum cash payment when the mortgage closes. How much depends on which lender you use. With traditional lenders, the most popular amount is five percent of your mortgage. Depending on which lender you use though, you can get anywhere from one percent to seven percent cash back on your mortgage.
Since the cash back is given once the mortgage closes, it cannot be used for the down payment. The cash back mortgage is tax-free and can be used for virtually anything you like: closing costs, renovations, furniture, or paying down other high-interest debts like credit cards.
How Does a Mortgage Cash Back Work?
How does a mortgage with cash back in Canada work? Let’s say you purchase a home for $350,000 and have a 20% down payment of $70,000. You choose a five-year mortgage with a rate of 3.79% that offers one percent cash back.
With the down payment, you’ll end up borrowing $280,000 from the bank ($350,000 – $70,000). Of that, you get a one percent cash rebate of $2,800 ($280,000 x 1.00%). If instead you opted for a five percent cash back mortgage, the lender would give you $14,000 up front.
Nothing is free when it comes to banks. A cash back rebate is always attached to a fixed mortgage and the rate is going to be a little higher than the interest rate attached to a standard, non-cash back, mortgage. In the example above, the standard mortgage rate would probably be around 3.25%.
That little extra bit of interest can add up.
Using the first example, if you selected a five-year fixed mortgage rate of 3.75%, you would end up paying the lender an extra $4,378 over the five-year term. That’s after you deduct the cash rebate you received when you closed the mortgage. Not everyone is willing to pay $4,378 for an upfront mortgage rebate of $2,800.
Eligibility for Cashback Mortgage
Not everyone qualifies for a cash back mortgage. Most traditional lenders, (Canada’s big banks) only offer them to those who have high credit scores, a low debt-to-income ratio, and full-time job (steady income). You also have to be living in the residence you’re buying; meaning, no renters can be on the property in question.
If your credit score is bruised or you’re new to Canada and don’t even have a credit score, or are self-employed, your odds of qualifying for a cash back mortgage is very remote.
Is a Cash Back Mortgage Right for You?
Like most financial products, there are benefits and drawback of a mortgage with cash back. On the plus side, the cash back you get when you close your mortgage is tax-free and can be used for whatever you like.
A cash back mortgage can be a good idea for those who need the money right away and don’t mind paying the slightly higher interest rate over the term of the mortgage. Thanks to a strong real estate market, the amount you paid in higher interest is offset by rising housing prices.
At the same time, you will be hit with penalties if you refinance, renew, or transfer your mortgage. That’s because cash back mortgages are only available with fixed term mortgages with a minimum term threshold.
If you refinance or break your mortgage early, you will probably be on the hook for a percentage of the cash back rebate (pro-rates based on the number of months left in the term). Some lenders will require you to pay back the entire amount in full.
This is an important consideration. Because the average Canadian moves, on average, every three years, a large number of homebuyers renew or refinance their mortgage. Depending on the lender, you could end up owing the usual three months interest on the balance (for breaking the mortgage) and the balance on the cash back mortgage.
FAQs about Cash Back Mortgages
1. Is mortgage cashback taxable?
The money you receive from a cash back mortgage is tax-free.
2. When is mortgage cashback paid?
Technically, the money you receive upfront with a cash back mortgage is paid back by the slightly higher interest rate you agreed to when you secured your mortgage. But because of the higher rate, you’ll pay more interest over the life of the mortgage term than the cash back you received.
3. What is the interest rate for cash back mortgage?
Cash back mortgages are always attached to a fixed-interest rate mortgage. And the rate that comes with a cash back mortgage is always a little higher than a standard mortgage.
4. Does credit score matters for cash back mortgage?
Credit scores are indeed important when it comes to securing a cash back mortgage. A good credit score means you have a long history of paying your bills on time. In addition to having excellent credit, you need to have a good credit profile and a steady, provable, income stream.
Canadalend.com, Helping Canadians Secure Home Equity Loans
If you don’t mind the higher interest rate, a cash back mortgage can be a great option for homebuyers who need a little extra money in the early stages of home ownership. To see if a cash back mortgage is right for you, speak with a licensed mortgage professional at Canadalend.com.
The mortgage experts at Canadalend.com are independent, that means they are looking out for what’s best for you. Traditional lenders, like Canada’s big banks, only want to sell you their own financial products, even if it’s not in your best interest.
The independent mortgage professionals at Canadalend.com have access to hundreds of different lends. Many specialize in providing mortgages and cash back mortgages to homebuyers with bad credit, no credit, and unreliable income.