Cash Back Mortgages: 5 things you need to know before signing on the dotted line

General Melanie Ward 28 May

Cash back mortgages can be a quick and easy way to get lump sums of money loaned back to you to do small renovations, reduce credit card debt, or pay off a more expensive car loan. Sometimes people get cash back mortgages when they are purchasing, but it is often when they are refinancing that cash back is considered. But like any other money lending product, it pays to do some research before signing a cash back mortgage.

1.What is a cash back mortgage?

Any time you get a mortgage, and they lend you money as well as the amount for the house it’s considered a cash back mortgage. Many people use their principal amount for renovations or to pay down debt, and then borrow the remainder: that would be a traditional mortgage. With a cash back mortgage, the most common sum you receive is 5% of your mortgage amount but it’s possible to get between 1% and 7% depending on the lender you choose.

2.How long can I get my cash back mortgage for?

The most typical term for a cash back mortgage is 5 years, but some lenders have 1,3,5 and 10 year terms. It’s important to note that if you break the term of the mortgage, there can be high penalties. The stats show Canadians move every 30 months, so it is a good idea to keep this in mind on potential costs.

3.Who offers cash back mortgages?

Many different lenders including mainstream banks. It pays to shop around for the best price and terms. Don’t just take the first place that offers you cash back.

4.What are the risks of a cash back mortgage?

  • It’s important to note that cash back mortgages always come with a fixed interest rate, and almost always charge a higher rate than standard mortgages. This is because lenders compensate for the additional money paid out upfront by charging a higher interest rate.
  • Cash back mortgages are most often lent out at 5 years, but most Canadians move more often than that. You will not only pay a penalty to get out, but you may be asked to pay off 100% your cash loan as well on TOP of the penalty. If that money didn’t go into improving your residence, or if markets have softened, you could be facing a large loss.

5.When does it make sense to get a cash back mortgage?

  • To pay for closing costs, like legal fees or land transfer taxes
  • To pay down higher interest debts
  • To pay for renovations
  • To help with cash flow during the first few months of home ownership
  • To invest or put into savings

Before signing for a cash back mortgage it’s better to discuss your needs with your local mortgage professional. They can advise you on cash backs, line of credit, Purchase plus Improvements or Flex Down mortgages which may be better for your situation.