Cash Back Mortgages
Description
Cash back mortgages return to you a percentage of your mortgage principal in a lump sum when your mortgage closes. Cash back mortgages differ from '0% down' mortgages - which are no longer available in Canada - as they still require you to put your own money up front for a down payment, but you receive the lump sum after your mortgage closes.
The chart below provides an overview of the different cash back mortgage products offered by various Canadian banks.
Pre-payment privileges: the annual lump sum percentage or monthly payment percentage you are permitted to increase your mortgage payment.
Penalty: if you break your mortgage before its term maturity, you must pay the designated cash back mortgage penalty in addition to the standard penalty for refinancing.
Cash Back Chart
| Bank | Cash Back % | Maximum Cash Back | Pre-payment Options | Penalty (in addition to IRD) |
|---|---|---|---|---|
| National Bank | 5.5% | $20,000 | Lump Sum: 10% Monthly: 100% |
Allocation of cash lump sum |
| PC Financial | 5% | Unlimited | Lump Sum: 20% Monthly: 25% |
Locked in for first 3 years Full cash re-payment after 3 years |
| TD Bank | 4.5% | $25,000 | Lump Sum: 15% Monthly: 100% |
Allocation of cash lump sum |
| CIBC | 2% - 7% | Unlimited | Lump Sum: 10% Monthly: 100% |
Full repayment of cash back amount |
| RBC Royal Bank | 4-7% | $20,000 | Lump Sum: 10% Monthly: 100% |
Allocation of cash lump sum |
| Scotiabank | Scotiabank does not offer a cash back mortgage. | |||
| ING | ING does not offer a cash back mortgage. | |||
| BMO | BMO does not offer a cash back mortgage. | |||
Reasons to consider a cash back mortgage
The cash requirement to purchase a home can be overwhelming, especially for first-time home buyers. In addition to saving for a down payment of 5% or more, home buyers must cover closing costs, home furnishings, and, in some cases, unaccounted for home renovations and repairs. For some, the assurance of receiving a lump sum returned to them is an attractive option; however, it is important to understand the full cost of a cash back mortgage.
It may even be possible to be loaned a portion of your down payment from immediate family ('traditional sources') and repay the loan upon receipt of the cash back lump sum. However, the Canadian Mortgage and Housing Corporation (CMHC) says it will only insure mortgages with non-repayable monetary gifts from immediate family.
Disadvantages of cash back mortgages
Cash back mortgage rates are higher than standard mortgage rates. You may get cash back now, but know that you will pay an interest rate premium throughout your mortgage term that is likely higher than the lump sum you received at present.
Cash back penalties are incurred if you refinance, port, transfer, or renew your mortgage before maturity, in addition to the regular refinancing penalties. You can compare the penalty amounts across lenders in the chart above. Breaking your mortgage early could cost you the allocation of the cash you received [(years left in term)/(years in term) x lump sum] upwards to full repayment. So, for example, if only 40% of your mortgage term has passed when you break your mortgage, you will have to pay your lender 60% of the cash lump sum.
Cash back mortgages are not available on variable rate mortgage products. You can only obtain a cash back mortgage on mortgages with a fixed rate and a term of three years or more.
A personal decision
Although the interest premium you will pay on a cash back mortgage may be higher than the cash returned to you when you mortgage closes, you may need the funds at present and place an intangible value on immediate access. It is a personal decision that must be made for your unique situation. However, it is important to keep in mind the drawbacks to a cash back mortgage discussed above.