Cash Back Mortgage in Canada
What You Should Know
- A cashback mortgage provides you with additional cash when finalizing your mortgage.
- The money is typically used to cover closing costs, make renovations, or buy furniture.
- A cashback mortgage interest rate is usually 1.75% higher than a conventional mortgage.
- If you break your mortgage early, you must pay back some of the cashback amount.
A cashback mortgage allows you to borrow additional money on top of your mortgage. You receive the loan deposit when your mortgage closes. Cashback lenders will typically lend you a lump sum of 1% to 7% of your mortgage amount, with the most common being 5%. Homebuyers usually choose to get a cashback mortgage in case there are any unplanned expenses after buying the home.
However, other popular reasons people get a cashback mortgage are buying furniture, covering closing costs, and more. Although this sounds great, there's always a catch! Continue reading to become an expert in cashback mortgages in five minutes.
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Cashback Mortgage Explained
Your cashback mortgage lender will deposit the lump-sum cash back into your account when the real estate transaction finalizes. There are various options for the cashback amount you can receive. Most homebuyers select a 5% cashback on their mortgage amount, but you can choose between 1% to 7%.
The cashback is calculated on your mortgage amount and not the total home purchase price. For example, if you buy an $800,000 home in Canada with CMHC mortgage default insurance, your minimum down payments could be $55,040. This means your mortgage amount is $774,758. You would receive cashback on this amount. If you select 5% cashback, you will receive an additional $38,738, and the total amount you'd need to pay interest on is $813,496. You can refer to the table below to see the amount you'd receive at various mortgage sizes and cashback percentages.
| Mortgage Size | |||
|---|---|---|---|
| Cashback Percentage | $300,000 | $500,000 | $800,000 |
| 1% | $3,000 | $5,000 | $8,000 |
| 5% | $15,000 | $25,000 | $40,000 |
| 7% | $21,000 | $35,000 | $56,000 |
After the mortgage has been finalized and cashback received, you'll need to make mortgage payments. Your cashback amount will be included in your mortgage payment amount and amortized over 25 years. Each mortgage payment will automatically contribute to paying off the cashback loan and your mortgage balance. You can use a mortgage interest calculator to see how much interest you'll pay over your mortgage.
Productive ways to spend your cashback
Now that you understand what a cashback mortgage is, you may want to know why you'd want one. As stated previously, the most common reasons people want a cashback mortgage are to help cover closing costs or to have an emergency fund if there are any issues with their new home. However, some other ways to spend your cashback include:
- Renovate your home
- Pay off high-interest debt
- Invest the money
- Put the money into savings
Cashback Mortgage Alternatives
A cashback mortgage is simply a type of mortgage in Canada. It is used if you need cash after buying a home or to finance closing costs. There are a few other mortgage alternatives.
| Name | Cost of Borrowing (APR) |
|---|---|
| RRSP Home Buyers' Plan | 0% |
| Readvanceable Mortgage | 2.75% to 6.0% on borrowed equity |
| Credit Card | 19.99% to 24.99% |
| Unsecured Loan | 4.99% to 19.99% |
- RRSP Home Buyers' Plan: This allows you to withdraw from your RRSP savings without any penalties. However, the money can only be used to contribute to your down payment. This option will free up some of your other savings for closing costs or buying furniture. The catch is that this money must be re-deposited into your RRSP within 15 years. We also have a guide on the RRSP Home Buyer's Plan to help you learn more.
- Readvanceable Mortgage: Combines your mortgage with a home equity line of credit. he HELOC allows you to withdraw money whenever you want, and you'll only be charged on the amount you use. You can learn more about this product through our readvanceable mortgage guide.
- Credit Card: This option charges the most interest, as demonstrated by the APR. However, your credit card balance is due 21 days after the statement. If you pay within 20 days, you will not be charged interest. If you are paid bi-weekly and responsible, you can pay off the balance with your next salary and not be charged interest. As a result, credit cards are best used as an interest-free payday advance. However, missing a payment or having too high a balance will affect your credit score.There are also some cash back credit cards that allow you to earn up to 5% back on your spending.
- Unsecured Loan: This type of loan is lent to you by a financial institution without requiring collateral. The APR is lower than a credit card but higher than a mortgage.
The hidden cost of a cashback mortgage
| Cashback mortgage rate | 4.79% |
| Non-cashback interest rate | 3.04% |
| Cashback interest paid | $141,185 |
| Non-cashback interest paid | $88,293 |
| Additional interest paid | $52,892 |
Cashback mortgages have a higher interest rate than just getting a conventional mortgage. This is to make up for the extra amount they lend you. We did some market research to determine how much higher a cashback mortgage interest is to help empower you to make the best decision. Generally, a cashback mortgage will have an interest rate that’s 1.75% higher than a mortgage without cashback. This increased interest rate is applied to your whole balance throughout the term, and not just the borrowed amount. This data can calculate the additional cost of a cashback mortgage throughout a five-year mortgage term of a $500,000 mortgage. Assume you select 5% cashback, meaning your mortgage increases to $525,000. As you can see, in exchange for the $25,000 cashback, you pay an additional $52,892 in interest.
Where to Get a Cashback Mortgage
Cashback mortgages are a hot product, and lenders don't want to miss out on the action. As a result, you'll have no challenge finding a lender to provide you with the funding. However, it can get confusing to compare the different lenders. Although one may have a lower posted interest rate, there could be a catch. We've read through the fine print of each lender to help you understand which company is best for you.
| Lender | Cashback Percentage Range | Maximum Cashback Amount | Mortgage Breaking Penalty |
|---|---|---|---|
| RBC | 1% to 7% | $20,000 | Partially repay cashback |
| Scotiabank | 1% to 5% | N/A | Fully repay cashback |
| CIBC | 1% | N/A | Fully repay cashback |
| Laurentian | 1% to 5% | $25,000 | Partially repay cashback |
RBC Cashback Mortgage
The mortgage can be fixed or variable-rate, and you can select a maximum term of 10 years. Savvy homebuyers may choose a fixed, 10-year term to lock in today's low-interest rates. RBCs cashback program will provide you with a maximum cashback of 7%, for a limit of $20,000.
Scotiabank Cash Back Mortgage
Scotiabank offers a cashback mortgage of up to 5%. The mortgage can be fixed or variable-rate, and you have the choice of a term for 3, 4, 5, 7 or 10 years. The catch is that if you break your mortgage early, you'll need to pay back the total cashback amount.
CIBC Wealth Builder Mortgage
The CIBC Wealth Builder Mortgage provides 1% cashback upfront and an additional distribution every three months. The mortgage must be closed with a fixed rate, meaning you can only pre-pay a specific amount each year. The term can be as low as 3 years and as high as 10. However, you must have a CIBC chequing and savings account to receive the cash. The cash you receive is fully repayable if you break your mortgage early.
Laurentian Bank Cash Back Mortgage
Laurentian's mortgage cashback program provides you with a maximum cashback of 5%, or $25,000. You have the opportunity to pre-pay the principal by up to 15% each year or increase your payments by 15%. The mortgage must be a closed, fixed-rate mortgage with a term of 5 years.
Cashback Promotional Offers
While the following banks don't offer the traditional cashback mortgage, they have limited-time promotional offers. You won't be able to choose the cashback percentage, but the programs are worth knowing.
| Lender | Cashback Percentage Range | Maximum Cashback Amount | Mortgage Breaking Penalty |
|---|---|---|---|
| CIBC | 0.4% | $3,000 | Fully repay cashback |
| BMO | 0.4% | $3,300 | Partially repay cashback |
| TD | 0.3% | $3,000 | Partially repay cashback |
| National Bank | 0.4% | $3,000 | Fully repay cashback |
CIBC Cashback Mortgage
CIBC currently has a cashback offer in addition to the wealth builder mortgage. However, the two programs can't be combined. There's a three-step process; talking with an advisor, selecting the right mortgage, and finally receiving the cashback.
The mortgage must be at least $100,000 and have a minimum term of four years. You must be a first-time homebuyer or transfer your mortgage from another financial institution to qualify. You can't receive the cashback offer if you're an existing client who refinances.
The cashback amount depends on your mortgage size but is typically fixed to 0.4%. You'll receive the funding within six to eight weeks after funding, and it must be deposited into a CIBC chequing account. If you break your mortgage term early, you'll need to pay back the entire cashback.
BMO Mortgage Cashback
BMO also currently has a promotional cashback offer. To be eligible, you must not have an existing mortgage with BMO and apply for a fixed or variable rate mortgage with a term longer than four years.
You can receive a maximum cashback of $3,300 with a mortgage larger than $1,000,000. The cashback amount decreases based on the size of your mortgage but is also typically around 0.4%
You'll receive the cashback within five business days of finalizing the mortgage. It will be deposited into your BMO chequing account, which is also how you'll need to make mortgage payments. If you break your mortgage, the penalty is pro-rated, meaning you won't need to pay the total cashback. Only the proportion depends on how early you broke your mortgage term.
TD Mortgage Cashback
TD Bank's special offer provides you with a maximum cashback of $3,000, or roughly 0.3% cashback. Unlike the other programs, you can qualify as an existing customer by refinancing your mortgage.
The mortgage must have a minimum term of four years and a principal of $150,000. The amount will be deposited into your account within 30 days of finalizing the mortgage. You must set up automatic payments through your TD chequing account to receive the cashback.
National Bank Cashback Mortgage
National Bank's offer provides you with a maximum cashback of $3,000 for mortgages larger than $750,000. As with the other programs, the cashback decreases with your mortgage size. The minimum cashback is $1,000 for mortgages between $100,000 and $250,000.
Cashback Mortgages Closed to New Applicants
Previously PC Financial and First National bank offered cashback mortgages. However, they no longer provide information on the programs.
The Bottom Line
A cashback mortgage can put money back into your pocket, which you can use for other purposes like home renovations or investing. Just remember that if you break your mortgage term early, you may have to repay the entire cashback amount.
Comparing cashback offers from different banks is an excellent way to ensure you're getting the best deal. But it's also important to compare interest rates and other terms to ensure you're getting the best mortgage for your needs.