Explaining A Cash Back Mortgage

​A cashback mortgage is a loan that once the agreement is confirmed, the borrower receives a cash advance. The cash is typically calculated as a percentage of the mortgage, but some lenders may choose to give a fixed amount based on a mortgage amount matrix. Borrowers can receive anywhere from 5 to 20% of their home's purchase price, depending on the agreement with their lender.

Generally, this type of loan has higher interest rates because of the cash advance. The borrower does not have to pay back the cash until they sell or refinance their home, however, many lenders may allow them to repay the initial lump sum in full before selling their house.

One benefit of taking out a cash-back loan is that the cash advance can help with the down payment or closing costs.

How Does A Cash Back Mortgage Work

Purchasing your very first home is an important financial choice. With property prices on the rise, saving for a down payment can be challenging. Cash-back mortgages help ease the burden of coming up with additional closing costs because they provide up to 5 percent of the mortgage amount in a sum lump sum payment on closing. Think of cash-back mortgages as a rebate on closing. 

Once you are approved for a mortgage, your lender will add the cash-back amount of your choice, up to 5 percent of the mortgage amount, to the total loan amount. On closing, your mortgage lender will advance your lawyer the mortgage proceeds required to close and the cash-back amount, which will come directly to you after closing. 
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If your mortgage amount is $500,000, for example; you could receive up to $25,000. Cash-back mortgages are also tax-free.

Can You Use A Cash Back As A Down Payment

In Canada, a purchaser must cover their down payment on a home either through personal savings, gifted money or another accepted form of down payment. A cash-back mortgage does not cover your down payment. You will be required to provide evidence of your down payment to qualify for a cash-back mortgage.

You can use a cash-back mortgage to cover unexpected costs after closing or help to cover some closing costs.

Breaking A Cash Back Mortgage

If you break your mortgage contract early, you will get charged a pre-payment penalty. The penalty will vary depending on whether your mortgage is a fixed or variable rate. Any cash-back will need to be repaid in addition to the penalty amount. So, for example, if your cashback was $10,000, you will need to pay this amount back on top of any penalty related to breaking your mortgage early. ​