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What are Cash Back Mortgages in Canada?

When purchasing a home, you want to begin making changes to make the home perfect for you. Whether that’s new flooring or a whole kitchen remodel. However, to do these jobs, you need the cash to facilitate it. But, you’ve just put down a lot of money for your house down payment, you might not have any left to do the changes you want. Luckily, some lenders in Canada offer what is called a “Cash Back Mortgage.” This results in you getting a cash rebate when you take out the mortgage.

With a cash back mortgage, your lender will provide you with a lump sum of cash when you sign for your mortgage. This is commonly around 5% of your total mortgage amount; however, it is possible to get slightly more. That means that if you get a mortgage for $500,000, you could get $25,000 to spend on your newly acquired property!

As of right now, RBC (Royal Bank of Canada) offers the potentially highest cash back rebate and will offer 4-7%

The Cost of Cash Back

It is always important to remember that money is never free, and there is a cost to the advancement of money.

A cash back mortgage will come with a fixed interest rate attached to it, and the rate will almost definitely be higher than your standard mortgage rate. It can be tempting to accept the cash to do the work you wish on your property. Still, it is always important to look at the situation logically and work out whether the calculations make sense for your personal situation.

However, it is important to note that the cash received from this rebate is tax-free, which means you will get the full sum.

People will often use the cash to pay for the closing fees on their house or supplement cash flow during the initial stages of homeownership, as often people will spend every penny they have to get into the home of their dreams.

Downsides of a Cash Back Mortgage

On top of the interest rates, there is another key potential downside of the cash back mortgage. If you need to break your mortgage early for whatever reason, you will be required to pay back an amount of your cash rebate. Some lenders will even require the amount to be paid back in full. It is important to look into the small print on your cash back agreement to see how your lender treats an early break on the mortgage agreement.

The best-case scenario is your lender requiring a pro-rated payback option. This means the amount you will be required to pay back is dependent on how long you have left on the cash paid. Most commonly, the period given on a cash back mortgage is 5 to 10 years. Therefore, let’s say you’ve been living in your property for 5 years and you decide to move house. This means that you will have 5 years remaining on your mortgage. You took a 5% rebate of cash on your $500,000 property, which means you will have received $25,000 when you moved into your property 5 years ago. As you have completed 50% of your cash back mortgage period, you would have to pay back $12,500 of that to break your mortgage early.

Comparatively, if you decided to break the mortgage at the same point with a lender who doesn’t prorate the payment at the break-point, you would actually need to pay back the full $25,000. It is essential to consider this scenario when signing up for a cash back mortgage, as this occurrence could be something that stops you from being able to buy that next property you want to move into.

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Jean-Maximilien is an expert in Canada and France about Loyalty programs, Credit cards and Travel. He is the Founding President of Milesopedia.

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