1. Buying
  2. Choosing a mortgage rate

Cash Back Mortgages

When you purchase a home, you may find that you need some extra cash. You might want to renovate, purchase furniture, or simply have a cash buffer during the first few months of homeownership. Fortunately, some Canadian lenders offer mortgages that give you a cash back rebate when you take out your mortgage.

With a cash back mortgage, your lender advances you a cash lump sum when your mortgage closes. 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.

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Let’s look at an example with someone purchasing a $350,000 home and putting $70,000 down (20%). They’ve opted for a 5-year fixed mortgage rate of 3.79% offering 1% cash-back.

$350,000 home value
$70,000 down payment
3.79% 5 year fixed rate
1.0% cash back percent
Step 1 : Calculate mortgage amount
$350,000 home price $70,000 down payment =
$280,000 mortgage amount
Step 2 : Calculate cash back value
$280,000 mortgage amount 1.0% cash back percentage =
$2,800 cash back amount

Lenders that offer cash back mortgages

Lender Cash Back Rebate Available Terms
RBC Royal Bank 4-7% 1 to 10-year fixed
CIBC Up to 5% 3, 4, 5, 7, 10-year fixed
Scotiabank Up to 5% 3, 4, 5, 7, 10-year fixed
TD Bank 4% 5-year fixed
PC Financial Up to 5% 5, 7, 10-year fixed
ATB Financial Up to 4% 5 or 7-year fixed
First National 5% 5-year fixed
Laurentian 1-5% 5-year fixed

The True Cost 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.

Continuing with our example above, the interest rate offered on the mortgage with a 5-year fixed rate was 3.79% with 1% cash back while the lowest 5-year fixed rate on a standard mortgage (i.e. no cash-back) is 3.25%.1

$49,321 cash back interest
$42,143 standard interest
3.25% 5 year fixed rate
Step 1 : Calculate extra interest paid on cash back mortgage vs standard mortgage
$49,321 interest on cash back mortgage $42,143 interest on standard mortgage =
$7,178 extra interest paid
Step 2 : Subtract the cash back value from the extra interest paid
$7,178 extra interest paid $2,800 cash back value =
$4,378 additional interest paid on cash back mortgage

Even if you subtract the cash rebate amount from the extra interest you’ll pay, you’ll still pay additional $4,378 over the 5-year term to receive the additional $2,800.

When Does a Cash Back Mortgage Make Sense?

The cash rebate you receive when you get a cash back mortgage is tax-free and you can use it for any purpose. Some of the most common uses are:

  • To pay for closing costs, such as legal fees and land transfer tax.
  • To supplement cash flow during the first few months of home ownership.
  • To pay for renovations or furniture purchases.
  • To invest, or put into savings.
  • To pay down high interest debt.

Breaking a Cash Back Mortgage Term Early

In addition to paying more interest on your mortgage, there is another drawback to getting a cash back mortgage. If you refinance or break your mortgage term early, you will need to pay back a portion of your cash back rebate to your lender - some lenders even require that you pay it back in full.

Lenders have different policies regarding the return of cash back rebates which require you to either pay back a portion, or the entire sum, of the rebate if you break your mortgage term early.

For example, let’s say you took out a $300,000 cash back mortgage with a 5-year fixed rate of 5.34%, and you received a 5% cash back rebate of $15,000. Three years into your 5-year term, you decide to break your mortgage term.

If your lender requires you to pay back the entire sum, in order to break your mortgage term early you would need to return the full $15,000 in addition to your prepayment penalty.

If your lender only requires a pro-rated repayment, you’ll want to determine how much this is. In our example, you have 2 years (24 months) left in your 5-year (60-month) term. To calculate what percentage of your rebate you would have to repay to your lender, you divide the number of remaining months in your term by the number of original months in your term:

$300,000 cash back mortgage
5.34% 5-yr fixed rate
5% cash back percent
Step 1 : Calculate cash back value
$300,000 mortgage amount 15.0% cash back percent =
$15,000 cash back value
Step 2 : Calculate percent of rebate to repay
$24 months ÷ $60 months =
40% percent of rebate to repay
Step 3 : Calculate value of rebate to repay
$15,000 cash back value 40% percent of rebate to repay =
$6,000 value of rebate to repay

The table below outlines the cash back rebate return policies of different lenders.

Cash Back Rebate Return Policies
Lender Pro-Rated Full Amount
RBC Royal Bank X
Scotiabank X
TD Bank X
PC Financial X
ATB Financial X
First National X
First Line Mortgages+ X
Laurentian X
National Bank of Canada* X
Resmor Trust Company* X
*These lenders no longer offer cash back mortgages to new homebuyers.

References and Notes

  1. This example uses market rates as of January 2014.