What is a Cashback Mortgage?
Cash back mortgages are becoming increasingly popular among borrowers, particularly those who have limited down payments. How do cash back mortgages work? Various lenders offer cash back programs, allowing a percentage of the property's value to be rebated to the borrower upon closing. The cashback on mortgage option can definitely help when it comes to paying closing costs, but borrowers should be aware that these products usually come with a couple of catches.
1) Higher interest rates
Before the days of 100% financing, the cash back mortgage was popular with homeowners who wanted to purchase but did not have the minimum required down payment of 5%, according to Leo Falkovsky, a mortgage professional with Mortgage Capital Inc., Toronto.
“The drawback to taking this cash back was getting a mortgage at posted rates versus discounted rates, resulting in the homeowner paying off a significantly higher amount of interest over the five-year term,” he says. “A homeowner would really have to crunch the numbers to calculate what’s more worthwhile, continuing to rent, or biting the bullet so to speak and overpay in interest in hopes of becoming a homeowner and eventually overcompensating that higher interest paid with a possible increase value in the property they were attempting to purchase.”

Adds Melanie McLister, mortgage planner at MyVirtualMortgageBroker.com, based in Windsor, Ontario: “That extra interest is what pays for the cash the bank is giving you.”

2) Clawback penalties
In addition to the higher interest, the lender would typically put in a ‘cash back hypothecation’ clause stating that should the borrower sell the property, payoff and not replace the mortgage against a new property being purchased, then the original cash back would be clawed back at the prorated amount.
For example, if a borrower took $5,000 cash back on a five-year term, sold the property after two years, and paid off the mortgage from the proceeds of the sale, then they would have to return $3,000 cash back to the lender for the remainder of the three years ($5,000 divided by five years multiplied by how many years are left in the term).

“We recently had a client who got $25,000 cash back and wanted to get out of a seven-year cash back mortgage one year in,” says McLister. “He had to pay over $9,000 in penalties, plus $21,400 of his cash back.
“There is no free lunch.”

As an example, TD Canada Trust’s 5% cash back mortgage rates are currently 6.65%. If you don’t choose the cash back mortgage, the rate drops to 5.59%. This extra 1.06% adds up to more than $10,250 in interest over five years. The net cost of your $5,000 cash back is therefore more than $5,250.
3) Variable rates are not available

Yet another downside to cash back mortgages, says McLister, is that they are not available at variable rates.
“For those with the tolerance for fluctuating payments and/or interest rates, variables have shown the potential over the long term to save you interest,” she says. “That’s not a benefit you’ll get with cash back mortgages.”

4) Limited availability
Since most lenders offering this product are A-paper lenders, borrowers need to have average to good credit in order to qualify. They also need a solid credit profile, sufficient and steady provable income, and typically 5% or more as a down payment.

“Qualifying for cash back mortgage products involves pretty much the same guidelines as A-paper lenders,” says Falkovsky.

“So, typically, this product is not available for sub-prime borrowers.”

McLister adds the big banks often require a credit score in the 700s for very high-ratio cash back mortgages. There are alternatives available for people in the 600s, but they’re only available through mortgage brokers and agents.

“Almost anyone can qualify for a cash back offer,” says Don Bayer, president of MonsterMortgage.ca, Toronto, “but there are a few drawbacks to most cash back offers.”
The main drawback, he says, is that the posted rate will cost the consumer almost twice the value of the cash back. This is a wise choice only if the consumer has no cash but wants to purchase a home.
“I try to suggest a number of other strategies because you can borrow the down payment of 5% and receive the best discounted rate. This is a much better deal than any cash back offer since, in my opinion, cash back offers generally only benefit the bank.”
Who can qualify for a Cash Back Mortgage
To qualify for a mortgage cash back in Canada you must:
  • be salaried or hourly-paid (not self-employed)
  • have to have a credit score or Beacon score of 650 or better
  • be applying as an owner-occupier
Crunching the numbers
Mortgage size (including CMHC fees)
Interest rate*
% cash back
Cash back amount (rounded)
Monthly mortgage payments
Total additional costs over 5 years (rounded)
Source: True North Mortgages
What’s out there?
Here’s a sampling of some of the cash back mortgage products being offered.
Interest rate
TD Canada Trust
6% cash back mortgage
6 years
Fixed for full term
TD Canada Trust
5% cashback mortgage
5 years
Fixed for full term
Citizens Bank of Canada
2-3% cashback mortgages (depending on term)
3, 4 and 5 years
Fixed for entire term
RBC Royal Bank
4, 5 or 7% cashback mortgages
Fixed rate closed term mortgages with terms of 1 to 10 years and on the 5 year variable closed term mortgage.
Fixed and variable available depending on term
Up to 5% cash back mortgage
3, 4, 5, 7 or 10-years
Fixed for entire term
Cashback mortgage
3, 4, 5, 7 or 10-years
Fixed for full term selected

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