Find out if a Cash-Back mortgage is right for you

A cash-back mortgage is a type of mortgage offered by lenders in Canada that allows borrowers to receive a lump sum of cash upfront after closing the mortgage. The cash-back amount is usually a percentage of the mortgage amount, and can range from 1% to 5% depending on the lender and the specific mortgage product.

The cash-back amount can be used by the borrower for various purposes such as paying for closing costs, home improvements, or consolidating debt. This feature makes it an attractive option for homebuyers who may need additional funds to cover their initial expenses.

While a cash-back mortgage may seem like a great option, it is important to understand that the cash-back amount comes with a higher interest rate than a regular mortgage. The interest rate on a cash-back mortgage is usually higher by about 1% to 2% compared to a regular mortgage. This means that the borrower will end up paying more in interest over the life of the mortgage. The higher interest rate is to cover the money paid to the borrower by the lender. This upfront money is basically a loan.

Furthermore, cash-back mortgages usually come with stricter terms and conditions. For example, some lenders may require borrowers to stay with them for a certain period of time, otherwise, they may be required to pay back a portion of the cash-back amount. Others may limit the prepayment options, which means that borrowers may not be able to make additional payments or pay off the mortgage early without penalty. Asking for the money back when breaking the mortgage terms is called a claw-back.

It is also worth noting that not all lenders offer cash-back mortgages, and those that do may have different requirements and terms. It is important to do thorough research and compare different mortgage products and lenders to ensure that you are getting the best deal for your needs.

When considering a cash-back mortgage, it is important to take into account your financial goals and circumstances. If you need the upfront funds for essential expenses, such as closing costs, and can comfortably afford the higher interest rate, then a cash-back mortgage may be a good option for you. If you do not need the cashback amount, or if you can obtain the funds through other means, it may be better to just choose a regular mortgage with a lower interest rate.

Cash-back mortgages can provide a borrower with an upfront cash infusion to cover initial expenses, but it also comes with a higher interest rate and stricter terms and conditions. Homebuyers should carefully weigh the pros and cons of this option and compare different mortgage products and lenders to make an informed decision.

Pros and Cons of Cash Back Mortgages in Ontario Canada

Pros:

Upfront cash infusion: One of the most significant advantages of a cash-back mortgage is that it provides borrowers with upfront cash to cover their initial expenses. This can be especially useful for first-time homebuyers who may not have saved enough for a down payment, closing costs, or other expenses related to homeownership.
Flexibility: Borrowers can use the cash-back amount for various purposes, such as home improvements, debt consolidation, or to cover unexpected expenses. This gives borrowers more flexibility and control over their finances.
Predictable payments: With a cash-back mortgage, borrowers have a fixed interest rate and regular mortgage payments, which can make it easier to budget and plan for the future.

Cons:

Higher interest rate: Cash-back mortgages typically come with higher interest rates than regular mortgages. The interest rate can be up to 2% higher, which means that borrowers will pay more in interest over the life of the mortgage.
Stricter terms and conditions: Cash-back mortgages often come with more strict terms and conditions, such as penalties for prepayment, and restrictions on refinancing or breaking the mortgage before the end of the term.
Limited options: Not all lenders offer cash-back mortgages, and those that do may have different requirements and limitations.

Now, let’s answer some common questions about cash-back mortgages in Canada

Q: How much cash-back can I get with a cash-back mortgage? A: The cash-back amount typically ranges from 1% to 5% of the mortgage amount, depending on the lender and the specific mortgage product. However, the cash-back amount may be subject to certain conditions, such as staying with the lender for a certain period of time.

Q: Can I use the cash-back amount for anything I want? A: Yes, borrowers can use the cash-back amount for various purposes, such as closing costs, home improvements, or debt consolidation. However, some lenders may have restrictions on how the cash-back amount can be used.

Q: How much will I pay in interest with a cash-back mortgage? A: Cash-back mortgages typically come with higher interest rates than regular mortgages, which means that borrowers will pay more in interest over the life of the mortgage. The interest rate can be up to 2% higher, depending on the lender and the specific mortgage product.

Q: Can I make extra payments on my cash-back mortgage? A: Some lenders may allow borrowers to make extra payments on their cash-back mortgage, while others may have restrictions or penalties for prepayment. It is important to check the terms and conditions of the mortgage before making extra payments.

Q: Are there any penalties for breaking a cash-back mortgage? A: Yes, there may be penalties for breaking a cash-back mortgage before the end of the term. The penalty amount may depend on the lender and the specific mortgage product.

Q: How do I choose the right cash-back mortgage for me? A: When choosing a cash-back mortgage, it is important to consider factors such as the interest rate, the cash-back amount, the terms and conditions, and the lender’s reputation. It is also important to compare different mortgage products and lenders to ensure that you are getting the best deal for your needs.

For more information on these and other mortgage products contact a mortgage broker. 416-912-6200