Cash Back Mortgages Explained
Buying a house is a big purchase – and that’s not even figuring in all the closing fees, land exchange taxes, and mortgage default insurance. One thing that people can always use more of when buying a house is money. A cash back mortgage can be one way to get the money you need.
While a cash back mortgage might sound like a saving grace when you’re buying your first home, there are a few things you might want to think about before jumping into this arrangement.
What is a cash back mortgage?
A cash back mortgage provides you with a lump sum of money representing between 1% and 7% of the total amount borrowed, depending on which lender you choose. The money is considered tax free and can be used for almost any reason, including buying new furniture, paying off other debts, or settling closing costs on the house.
This can be a boon for the cash-strapped home buyer. Here’s an example of how they work:
- You buy a house for $200,000 and put down a $40,000 down payment.
- You borrow $160,000 from the bank and qualify for 5% cashback.
- You will receive 5% of the total $160,000 borrowed. This amounts to $8,000 in your eager little hands when the mortgage closes.
Who actually offers these mortgages?
You don’t need to turn to Louie the Loan Shark for these mortgages. Banks and credit unions across the country offer several options for the cash back mortgage.
Royal Bank Canada
Royal Bank offers several options for a cash back mortgage. You can receive a 4% to 7% lump sum, depending on size and term of your loan. It must be a fixed term mortgage ranging from 1 to 10 years and will max out at $20,000 cash back.
CIBC Bank
CIBC does things a little differently, offering up to 2% cash back on a minimum 3 year fixed term and up to 5% on a minimum 5 year fixed term. They also offer up to 2% money back on a variable flex mortgage.
TD Canada Trust
TD Canada Trust offers up to a 5% lump sum on your total mortgage amount, to a maximum of $25,000 cash back. They offer this option on mortgages ranging from 2, 3, 4, 5, 6, 7 and 10 year fixed terms.
Scotiabank
Like some of the other banks, Scotiabank offers up to 5% cash back on 3, 4, 5, 7 and 10 year fixed-term mortgages.
Okay, what’s the downside?
While there are some definite pluses to having the cash, it’s important you know that it will cost you. Most lenders only offer cash back on fixed term loans. Additionally, you can expect to pay a slightly higher interest rate than you would on a standard mortgage. For instance, a cash back fixed term mortgage may be offered at 3.8% versus a standard fixed term mortgage at 2.99%. That can add up to thousands of dollars in interest over the years and higher home insurance rates.
In addition, if you need to refinance your mortgage or break the term early, you may be on the hook for the amount you received as cash back. Depending on the lender, you may be on the hook for the entire amount or a pro-rated amount at the time you dissolve your loan.