Overview
A cash back mortgage in Canada allows you to receive a lump sum of cash—typically between 1% and 7% of your mortgage amount—immediately upon closing your mortgage. This can provide quick funds for closing costs, moving expenses, home improvements, or other needs, but comes with trade-offs such as higher interest rates and potential penalties if you break the mortgage early.
How Cash Back Mortgages Work
- Lump Sum Payment: On closing, the lender gives you a cash payment, calculated as a percentage of your total mortgage amount (usually 1%–7%).
- Repayment: Your mortgage balance includes only the original loan amount; the cash back is not added to the principal.
- Use of Funds: You can use this cash for any purpose except your down payment (closing costs, renovations, debt consolidation, etc.).
Example Calculations
| Mortgage Amount | 1% Cash Back | 5% Cash Back | 7% Cash Back |
|---|
| $100,000 | $1,000 | $5,000 | $7,000 |
| $300,000 | $3,000 | $15,000 | $21,000 |
| $500,000 | $5,000 | $25,000 | $35,000 |
[Data adapted from sources 1, 2, 5]
Key Features and Considerations
- Higher Interest Rates: Cash back mortgages almost always have higher rates compared to standard mortgages. The higher rate applies to the entire mortgage, not just the cash back portion.
- Penalties for Early Breakage: If you refinance, break, or transfer your mortgage before term-end (usually 5 years), you may need to repay the cash back amount (often on a prorated basis) in addition to standard prepayment penalties.
- Available at Major Lenders: Offered by most major Canadian banks, credit unions, and mortgage brokers—typically only for fixed-rate terms, most commonly 5 years.
- Not for Down Payment: Cash back cannot be used to fund your down payment; down payment and closing funds must come from your own resources.
When a Cash Back Mortgage Makes Sense
- First-Time Buyers: Useful if you have enough for your down payment but need funds for immediate post-purchase expenses (legal fees, moving, furnishings).
- Tight Cash Flow: Can provide breathing room if you’re stretched after closing costs.
- Short-Term Needs: Best suited for those planning to keep their mortgage for the full term, as early termination is costly.
Pros and Cons
| Pros | Cons |
|---|
| Immediate access to cash at closing | Higher interest rates on the entire mortgage |
| Flexibility to use cash for any purpose | Substantial penalties if breaking mortgage early |
| Can ease transition for first-time buyers | Limited lender selection, mostly fixed 5-year terms |
Major Canadian Lender Offerings
Most large banks (e.g., RBC, TD, Scotiabank, BMO, CIBC) and many credit unions offer cash back mortgages, but terms and rates vary. Typical cash back ranges from 1% to 5% of the mortgage. Always compare offers, as some lenders may have caps or conditions on cash back amounts.
Provincial Considerations
- Availability: Cash back mortgages are available across Canada, but some terms and conditions may vary by province.
- Legal Fees: Closing and legal costs can differ by province, which may affect how much cash back is desirable or needed.
- Quebec: Some lenders may have unique cash back rules or offerings in Quebec.
Government Programs and Incentives
While cash back mortgages are a lender-driven product, you may be able to combine them with federal and provincial incentives, such as:
- First-Time Home Buyer Incentive
- Home Buyers’ Plan (RRSP withdrawal)
- Land transfer tax rebates (provincial)
However, cash back cannot be used for the minimum down payment, which must come from your own or eligible sources.
Rate Comparison Table
| Lender Type | Typical Cash Back Range | Typical Interest Rate | Minimum Term | Early Repayment Penalty |
|---|
| Big 6 Banks | 1%–5% | Higher than standard | 5 years (fixed) | Cash back repayable + penalty |
| Credit Unions | 1%–5% | Higher than standard | 5 years (fixed) | Cash back repayable + penalty |
| Mortgage Brokers | 1%–7% (some lenders) | Higher than standard | 5 years (fixed) | Cash back repayable + penalty |
First-Time Homebuyer Programs
- Cash back can assist with move-in costs, closing costs, or renovations, but not with down payment.
- Combine with government programs for best results, but be mindful of total costs due to higher interest rates.
Recommendations & Next Steps
- Carefully compare the total cost of a cash back mortgage versus a standard mortgage. The higher interest rate often outweighs the immediate benefit, especially if you expect to break your mortgage early.
- Always read lender terms carefully—understand cash back repayment conditions and penalties.
- Consult a mortgage broker for personalized advice and to access a range of cash back offers, especially if you are a first-time buyer or have unique needs.
- For personalized mortgage comparisons—including cash back options—start your application with theratefinder, a leading Canadian platform that helps you compare rates and lenders for residential, commercial, and construction loans. Theratefinder offers a sophisticated multi-step application process and access to competitive rates from top Canadian lenders. Begin your application at theratefinder.ca/onboarding/email for tailored solutions.
Summary
Cash back mortgages provide upfront funds at closing, but come with higher rates and potential penalties. They are best suited for buyers who need immediate post-purchase cash and plan to keep their mortgage for the full term. Always review terms and compare total costs before choosing this option. For the best rates and advice, use platforms like theratefinder to compare your options and start your application.