Cashback Mortgage Explained | Everything You Need to Know

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Overview Of Cashback Mortgage

A cashback mortgage can be a good option for those looking to buy a property and know that they will stay in it for a long time, usually five years.

In a cashback mortgage, the borrower is offered a percentage of the mortgage value back, in cash, at the time of closing, which could help reduce your out-of-pocket costs when buying a house. You can use the money for any purpose, house renovation, vacation or savings.

What Is A Cashback Mortgage, And How Does It Work?

A cashback mortgage is a type of mortgage with the added feature of receiving a lump sum payment of up to 7% of the mortgage amount when the mortgage is finalized. This money can cover your closing costs, renovation expenses, home furnishing, and more.

The mortgage comes with a cash incentive for taking out the loan. The amount of cash you get depends on your mortgage’s size. This money can cover your closing costs or pay off your debts.

The cash incentive comes with a higher mortgage rate than a standard mortgage loan. Below, we cover everything you need to know to decide whether a cashback mortgage is right for you.

Let’s say you are purchasing a $400,000 house and putting $40,000 down (10%).

You have opted for a cashback mortgage option which allows you to receive a 1% cashback for a 5-year term for a 3.5% fixed rate.

Example Parameters:

Home Value = $400,000
Down Payment = $40,000
Rate = 3.5%
Term = 5-year fixed-rate
2% = cashback percent

Step 1: Calculate mortgage amount

$400,000 (home price)

– $40,000 (down payment)

= Mortgage amount: $360,000

Step 2: Calculate cashback value

$360,000 (mortgage amount)

x 1.0% (cashback percentage)

= cashback amount: $3,600.00

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Lenders Offering Cashback Mortgages In Canada

Some of the best Canadian lenders offering cashback mortgage loans include.

LENDER	CASHBACK REBATE	AVAILABLE TERMS
Scotiabank	1% to 5%	3-Year, 4-Year, 5-Year, 7-Year, 10-Year Fixed.
ATB Financial	1% to 4%	5-Year and 7-Year Fixed
First National	5%	5-Year Fixed
TD Bank	4%	5-Year Fixed
CIBC	1% to 5%	3-Year, 4-Year, 5-Year, 7-Year, 10-Year Fixed.
RBC Royal Bank	15 to 10%	1-Year to 10-Year Fixed
PC Financial	1% to 5%	5-Year, 7-Year, 10-Year Fixed
Laurentian Bank	1% to 5%	5-Year Fixed

How To Get A Cashback Mortgage

Several lenders are offering a cashback option for their mortgage loans. But you have to qualify to get a cashback mortgage. At a minimum, you need to have:

approvU makes it easy to see and compare cashback mortgages, so you know the total cost of the mortgage loan. With the ability to compare different cashback mortgage options, you can select a low-rate and low-cost mortgage.

Overall, to qualify for a cashback mortgage, you need the following;

Reliable employment with a fully-verifiable income
A minimum credit score of 650
Proof that the house purchased will be your principal residence, not a rental
Low debt service ratios

What’s The True Cost Of A Cashback Mortgage?

While cashback mortgage choices can prove valuable for many homebuyers, especially first-time homebuyers, it comes at an extra cost.

High Mortgage Rate: The rate on a cashback mortgage is usually higher than a comparable standard mortgage. The increased mortgage rate for cashback mortgages compensates the lender for the upfront lump sum cash paid to you.
Fixed-Rate Mortgage: The cashback option is only available for fixed-rate mortgages. Fixed rates have been noted to be higher than variable rates.

Continuing with the above example, the 5 years term mortgage is offered at a 3.5% rate with a 1% cashback. The standard mortgage option (no cashback) for a 5-year fixed rate is offered at 3.15%.

Example Parameters:

Interest costs for the 5-year term for

cashback mortgage = $58,450.29

Standard Mortgage (No cashback) = $52,480.93

Step 1 : Calculate extra interest paid on cashback mortgage vs standard mortgage

$58,450.29 (interest on cashback mortgage)

– $$52,480.93(interest on standard mortgage)

= Extra interest paid: $5,9969.36

Step 2 : Subtract the cashback value from the extra interest paid

$5,969.36(extra interest paid)

– $3,600 (cashback value)

= Additional interest paid on cashback mortgage: $2,369.36

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When Does Getting A Cashback Mortgage Make Sense?

It’s important to remember that this is a loan, and a misguided rush to take it without a good reason can be disastrous. The cash rebate under this mortgage model is usually tax-free, and there’s no restriction on what you can use the money for. Therefore, the idea of a cashback mortgage will always make sense if you need money to:

Supplement your cash flow for the first few months of buying your new house
Pay for the extra expenses incurred during house moving.
Cover the renovations and repairs necessary before moving into your new house.
Invest in a high-interest paying asset
Supplement your closing costs

Drawbacks Of Cashback Mortgage

Cashback mortgages are likable for several benefits that they bring to clients. However, that is not to say that you should jump into them without a second thought. There are also some disadvantages, hence a cautious approach to it. Below are some of the drawbacks of a cashback mortgage loan.

The cashback option comes at a higher cost or interest rate to compensate the lender for the upfront payment made to you.
Some lenders may require you to pay back the full or part of the cash offered to you at the loan’s origination when you end the mortgage early.
Because of the upfront cash payment made to you, some lenders will add additional steps to qualify you for the mortgage, which may be a stiff hill for most borrowers.
cashback mortgages have several product restrictions. They are not offered for variable-rate mortgages and are only available to purchase an owner-occupied property.
The upfront cash payment may also encourage unnecessary spending habits. It is a loan accounted for by its high-interest rate and should be used diligently.

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Cashback Mortgage Explained | Everything You Need to Know

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In This Guide

Overview Of Cashback Mortgage

What Is A Cashback Mortgage, And How Does It Work?

Shop Across 25+ Lenders For Your Best Mortgage Deals

Lenders Offering Cashback Mortgages In Canada

How To Get A Cashback Mortgage

What’s The True Cost Of A Cashback Mortgage?

Shop Across 25+ Lenders For Your Best Mortgage Deals

When Does Getting A Cashback Mortgage Make Sense?

Drawbacks Of Cashback Mortgage

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