Find the best 5-year cash back mortgage rate

Buying a home is an expensive prospect, so it may leave you a little cash poor when you first take out a new mortgage, especially if you're a first-time home buyer. If this is something you're concerned about, then a cash back mortgage might be worth considering.

Cash back mortgages return to you a percentage of your mortgage principal in a tax-free lump sum when your mortgage closes (ie when your property purchase is finalized). 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 upfront for a down payment, but you receive the lump sum after your mortgage closes.

The problems with cash back mortgages

Cash back mortgages aren't without their downsides, and you need to be fully aware of the true cost of them before you pull the trigger. Here are a few ways a cash back mortgage can be more expensive:

Higher mortgage rate

Cash back mortgages come with higher mortgage rates, which compensate your lender for the upfront cash that they give you. Generally, this rate more than covers the cash back amount, which means you're worse off overall. If you don't absolutely need a cash back mortgage, it's generally cheaper to opt for a traditional mortgage instead.

Cash back repayment penalty

If you break your mortgage before its term maturity, you must pay the designated cash back mortgage penalty. The cash back penalty can be as much as the entire cash back amount, or a pro-rata amount of the cash back, based on how much of your mortgage term is remaining. Note that the cash back repayment penalty is charged in addition to the standard penalty for breaking your mortgage. Since cash back mortgages are only offered with fixed-rates, the standard penalty may already be quite expensive.

Cash back mortgage providers in Canada

The table below lists some of Canada's larger providers of cash back mortgages, and highlights a few of the key product features.

Which banks do not offer cash back mortgages?

Not all banks offer cash back mortgages. If you are set on getting a mortgage with any of these providers, you'll need to consider a traditional mortgage instead. Here are some of the larger financial service companies in Canada that do not offer cash back mortgages:

• Tangerine (previously ING Canada)
• BMO (Bank of Montreal)

Note that the term Cash Back is sometimes also used when advertising offers to switch mortgage providers. In this case, you would receive a cash gift if you switch your mortgage and chequing account to a particular provider. This is not quite the same as a cash back mortgage, although it may operate in a similar way. It's important to be careful and fully understand the terms and conditions of any offer you take up.

Reasons to consider a cash back mortgage

The cash required 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.

The bottom line

Although the interest premium you will pay on a cash back mortgage may be higher than the cash returned to you when your mortgage closes, that cost could be worth getting immediate access to those funds. It's a personal decision that must be made for your unique situation. However, it'a important to keep in mind the drawbacks to a cash back mortgage discussed above. If you're not sure what the best course of action is, it might be a good idea to speak to a mortgage broker about your options.