If you are in the process of buying a home and are nearing your budget limit, a cashback mortgage can alleviate some of the financial strain. This type of mortgage allows you to secure a loan and receive an extra lump sum of money that you will receive either at or after closing. Cashback can be used for various expenses, such as purchasing furniture, renovating, or paying off debts with higher interest rates.

Key Takeaways

• Cashback mortgages allow borrowers to secure a mortgage and receive a lump sum at close. 
• Cashback mortgages typically have higher interest rates to offset the lender providing cash upfront. 
• Cashback promotional offers aim to attract borrowers and generate business.

What Does Cashback Mortgage Mean?

When you close on a cashback mortgage, the lender advances a one-time lump sum payment, typically a percentage of the total loan amount. The amount of cashback will vary among lenders as it’s tied directly to the amount of the loan and the percentage of the mortgage amount the lender offers as cashback on the mortgage. 

Since the amount is tied directly to the loan amount, the larger your mortgage, the higher the cashback you can receive at or after closing. However, the lender may limit the maximum cashback you receive, so it’s important to review the mortgage terms and conditions carefully. There are no limitations on how you spend your cashback, but your downpayment and closing costs must be covered by your funds to secure the mortgage.  

How to Calculate a Cashback Mortgage

Depending on the lender, cashback mortgages are determined by a percentage of the total loan amount, which usually varies from 1% to 7%. For example, if you have a mortgage of $500,000 and your lender offers cashback mortgages, you can select either 1%, 5%, or 7% for cashback amounts of $5,000, $25,000, or $35,000.

Cashback Mortgages and Cashback Promotional Offers

Cashback mortgages offer a one-time lump sum payment based on a percentage of the total mortgage amount paid out at or after closing. With this type of mortgage, your notary or solicitor will disburse the cashback as set out in your lender’s mortgage instructions. 

Cashback promotional offers are a way for lenders to generate new business. These promotional offers may have conditions attached, like minimum mortgage amounts or mortgage amount tiers, that base your cashback offer on the tier under which the mortgage amount falls. For example, a mortgage between $250,000 and $500,000 may have a cashback offer of $1,000, a mortgage between $500,001 and $999,999 may have a $2,000 cashback offer, etc. 

In some cases, cashback promotional offers may have certain conditions attached, such as opening a chequing or savings account to receive the offer or requiring mortgage payments from a specific account the lender offers. Cashback promotional offers are typically paid after the mortgage closing and may require waiting a few weeks or months before the amount is deposited into your bank account. 

Cashback mortgage and promotional offers may have other conditions attached that could require you to repay all or a portion of the cashback amount you receive if you break the mortgage before the end of the term. 

How to Use Your Cashback Mortgage

Cashback mortgages allow you to use the funds you receive for various purposes, allowing borrowers to allocate the money where it’s needed most. Some of the ways you can use the funds from a cashback mortgage include:

• Finance home improvements or renovations
• Furnish and decorate your new home
• Cover moving costs
• Pay higher interest debts
• Closing costs

This type of mortgage benefits borrowers who need to cover other expenses related to the mortgage process. It helps borrowers qualify for the mortgage and secure the financing required to purchase or renew. A true cashback mortgage can be utilized before receiving the mortgage to clear debts and meet the lender or insurer’s criteria. The borrower does not receive funds directly, but they are instead sent to the real estate lawyer or notary to pay off any remaining debts specified in the mortgage agreement signed by the borrower. 

If the cashback amount is used for closing costs, the borrower must first show that they have the necessary funds to cover these expenses before the mortgage can be funded. Applying the cashback amount to cover closing costs means the borrower may not need to withdraw the amount from their savings or investments. After subtracting closing costs such as legal fees, mortgage discharge fees, and refinance expenses, the lawyer or notary can distribute any leftover funds to the borrower. 

What Lenders Provide Cashback Mortgages?

Few lenders include cashback mortgages as part of their selection of mortgage products compared to lenders with cashback offers. Here are some cashback mortgages lenders offer:

RBC Cashback Mortgage

RBC offers cashback of up to 7%, depending on the size of your mortgage, for fixed-closed terms of 1-10 years. The maximum cashback limit is $20,000, paid on the date the mortgage is advanced. If you break the mortgage before the end of the term, the cashback amount must be reimbursed in proportion to the time left on the mortgage term, as calculated based on a prorated amount. 

Scotiabank Cashback Mortgage

Scotiabank offers up to 5% cashback based on the mortgage amount for fixed-term options of 3, 4, 5, 7, or 10 years. If you pay out, assume, transfer, or renew the mortgage before the end of the term, you will be required to repay the cashback based on a prorated amount calculated based on the time remaining in the mortgage term.

What Lenders Have Cashback Offers?

Many lenders currently have cashback promotional offers available to attract new clients. These offers are more readily accessible compared to cashback mortgages. Here are some lenders currently offering Cashback promotions:

nesto Cashback Offer

nesto offers 1% (up to $9,250) cashback for newly funded or renewed mortgages. The loan amount must be between $125,000 and $925,000, and the property value or purchase price cannot surpass $999,999.99 to qualify for the offer. 

Cashback will be deposited into the bank account used for nesto mortgage payments within 7 to 14 days after the mortgage disburses. If you discharge, transfer, or refinance before the end of the mortgage term, you may be required to repay all or a part of the cashback amount. 

BMO Cashback Offer

BMO is currently running a summer promotion providing customers with a cashback of up to $4,100 when applying for a new fixed or variable closed-term mortgage or Homeowner RediLine. The mortgage term must be at least 3 years, and the amount borrowed must be at least $100,000 to be eligible for the offer. 

Cashback amounts are based on tiers calculated according to the loan amount. Additionally, you must have an existing or open a chequing account to use as the mortgage preauthorized debit (PAD) account. If the mortgage has not been held with BMO for at least 5 years, a portion of the cashback must be repaid based on a prorated amount. 

CIBC Cashback Offer

CIBC offers up to $3,500 cashback for new or transferred mortgages. Mortgages must be fixed-rate closed with a term of 3 years or more or 5-year variable flex. The cashback amount will be determined based on the loan amount, with an additional $1,000 bonus for transferring your mortgage from another financial institution. 

Cashback amounts are based on tiers calculated according to the mortgage amount. You must set up pre-authorized mortgage payments through a CIBC chequing account to qualify. You can expect to receive the cashback amount in your account within 6-8 weeks of the mortgage being funded.

TD Cashback Offer

TD provides a cashback reward of up to $4,100 for new, refinanced, or switched mortgages with a minimum 3-year closed term. Cashback amounts are tiered based on the mortgage amount, and the principal must be at least $100,000. To qualify, mortgage payments must be preauthorized and debited from a TD chequing or savings account. Cashback will be credited within 60 days of funding. 

Alternative Options to Cashback Mortgages

If a cashback mortgage doesn’t suit your needs, there are other mortgage options available to consider that can help you obtain additional cash.

Cash-Out Refinance (Equity Takeout)

Cash-out refinances, or equity takeouts, allow you to borrow more than your current mortgage amount using the equity accumulated as collateral. You can withdraw the extra as cash by refinancing for a larger mortgage amount. This is often mistaken for cashback mortgages, but the difference between them is that the amount you take out with an equity takeout is added to your mortgage balance and paid off as you make mortgage payments and pay off the mortgage. 

HELOC (Home Equity Line of Credit)

A HELOC offers the flexibility of having multiple mortgage solutions that can include a line of credit in addition to your mortgage. This lets you tap into your home’s equity as you make mortgage payments. As you continue to pay off more of your mortgage, you can access more of your equity. With a HELOC, you can access the equity as cash anytime and use it whenever necessary without refinancing your mortgage. 

Disadvantages of a Cashback Mortgage

Although receiving tax-free cash immediately when getting a mortgage may seem enticing, there are some disadvantages to consider before opting for a cashback mortgage. 

Clawback

Terminating a cashback mortgage before the end of the agreed term may mean you must reimburse all or a portion of the cashback you receive, depending on the terms and conditions set out by the lender. This will be in addition to any prepayment penalties. 

Higher Interest Rates

Cashback mortgages typically have higher interest rates for the lender to offset the expense of offering cash upfront. Compared to other types of mortgages, the higher interest rate could result in a higher cost than the amount of cashback you receive. It’s advisable to compare the cost savings from interest expenses over the term to determine if the cashback amount is worth the higher rates. 

For example, if you have a $500,000 mortgage on a 5-year term with a 5% downpayment, you could be offered an interest rate of 4.49%. This would mean you pay approximately $104,000 over the 5-year term on a 25-year amortization. 

If you chose a 5% cashback mortgage with an interest rate of 5.99%, you will receive $25,000 in cashback, but you will pay $139,000 in interest over the 5-year term. This means that to access $25,000 in cashback, you will pay an additional $35,000 in interest, resulting in a net loss of $10,000. 

Frequently Asked Questions

Final Thoughts 

Cashback mortgages can benefit borrowers looking to cover immediate expenses like renovations or repay debts. However, before choosing a cashback mortgage, you must carefully assess the potential long-term interest costs and the terms for repaying cashback should you break the mortgage before the end of the term. 

Contact our mortgage professionals today to see what mortgage solution best matches your needs and saves you money.