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What Is A Cash-Back Mortgage? A Comprehensive Guide

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An illustration of a Cash-back Mortgage on the mobile device
Reading Time: 4 Min

In the world of home financing, cash-back mortgages have emerged as a popular choice for prospective homeowners. These special mortgage agreements provide borrowers with a lump-sum cash payment upon the finalization of their mortgage contract.

But what exactly is a cash-back mortgage? How does it work, and who qualifies for one? This article dives deep into the world of cash-back mortgages, offering a detailed overview of this unique financial product.

Key Takeaways

Introduction

A cash-back mortgage is a distinctive type of home loan where a borrower gets back a portion of the loan amount in cash when the deal closes.

This type of financial option has gained popularity recently, especially among first-time home buyers or those with tight budgets seeking extra funds for upfront expenses linked to buying a new home.

The cash-back portion typically falls between 1% and 7% of the entire loan, varying based on the lender’s rules and the mortgage’s size and duration.

Yet, it’s important to note that while cash-back mortgages may look appealing with instant cash, they often carry higher interest rates compared to standard mortgages.

Key Concepts of Cash-Back Mortgages

How Does a Cash-Back Mortgage Work?

Essentially, with a cash-back mortgage, your lender gives you extra money that you can use for upfront home expenses like closing costs or moving fees.

However, keep in mind that this additional money isn’t free – it’s a loan that requires repayment, often at a higher interest rate compared to your primary mortgage.

For example, When you secure a $400,000 mortgage and opt for a 5% cash back, which is $20,000, you’ll receive this extra amount as a single payment when the mortgage closes. Although your registered mortgage shows $400,000, the actual debt you owe stands at $420,000, with the extra $20,000 marked as an additional loan requiring repayment.

Who Is Eligible for a Cash-Back Mortgage?

Cash-back mortgages have their benefits, but they’re not a one-size-fits-all. You need to meet certain requirements set by the lender to be eligible for cash-back mortgages, including:

  • Stable employment, where you earn a salary or are paid by the hour.

  •  A credit score of at least 650.

  •  Plans to occupy the home yourself, meaning you don’t intend to rent it out.

Self-employed individuals and those with substantial debts might find it challenging to qualify for cash-back mortgages. It’s wise to consult a mortgage advisor to see if a cash-back mortgage aligns with your financial circumstances.

Cash-Back Mortgage Rates

Getting extra cash through a cash-back mortgage might seem helpful, but these mortgages often come with substantially higher interest rates compared to regular ones. 

This elevated interest rate applies to the whole loan amount, not just the cash-back portion, leading to notable additional interest costs.

Most lenders provide cash-back deals solely on fixed-rate mortgages, though a few offer them on variable-rate mortgages as well.

Pros and Cons of Cash-Back Mortgages

Like any financial product, cash-back mortgages have their advantages and disadvantages. Below are the pros and cons of cash-back mortgages:

Pros

  • Immediate Funds: Cash-back mortgages provide you with immediate access to cash that can be used to cover additional homeownership expenses.

  • Unified Payments: Your mortgage and the cash-back loan can be paid with the same monthly payment.

  •  Wide Availability: The availability of cash-back mortgages across various lenders allows you to compare shops and find the right rate and terms for your financial situation.

Cons

  • Higher Interest Rates: Cash-back mortgages typically come with higher interest rates than a traditional mortgages.

  • Stricter Qualification Requirements: Cash-back mortgages may have stricter qualification requirements.

  • Penalties: If you decide to change or break the cash-back mortgage contract early, you may face penalties, including being required to pay back some or all of the cash advance.

Comparison: Cash-Back vs. Traditional Mortgage

To better understand the nuances of cash-back mortgages, it’s helpful to compare them with traditional mortgages.

Mortgage TypeCash-Back MortgageTraditional Mortgage
ProsImmediate cash, potential to cover additional expenses, unified paymentsLower interest rates, flexible terms, competitive conditions
ConsHigher interest rates, stricter qualification requirements, penalties for contract changes or breaksNo cash back
Ideal ForBorrowers who need immediate cash for closing costs, home improvements, debt consolidation, etcBorrowers who seek the lowest possible interest rate and flexible terms.

Alternatives To Cash-back Mortgages

If a cash-back mortgage doesn’t suit your preferences, there are various other funding possibilities available to explore:

  • Second Mortgage or Home Equity Loan: These options let you convert home equity into cash once you’ve purchased the property.

  •  Personal Loans: These are easily accessible and offered at reasonable rates for those with good credit scores.

  •  Line of Credit: A more adaptable choice compared to personal loans, often with better interest rates.

  • RRSP Home Buyers Plan: Allows borrowing from your Registered Retirement Savings Plan (RRSP) to aid with down payments and closing expenses.

  • Credit Card: A low-interest or fee-free credit card provides flexibility for moving expenses or buying furniture, enabling payments over time.

Each option has its advantages and disadvantages, so it’s essential to evaluate your financial circumstances and requirements before making a decision.

Conclusion

In conclusion, a cash-back mortgage can help some borrowers who need quick money for home expenses. But it’s important to know about the higher interest rates and possible penalties before choosing this mortgage.

Getting advice from a financial advisor or mortgage expert is wise for your specific situation. Explore different mortgage options and their pros and cons before making a decision. Whether you pick a cash-back or traditional mortgage, make sure it fits your financial plans. Happy house hunting!

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Author Bio

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Mohamed Konate

Mohamed Konate is a personal finance expert, blogger, and marketing consultant based out of Toronto. He is a former financial services professional who worked for many years at major Canadian financial institutions where he managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor in Business Administration from the University of Quebec (Montreal) and a Master in International Business from the University of Sherbrooke (Quebec).He is also the author of the Canadian Credit Card Guidebook. Read his full author bio

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