All About Cash Back Mortgages

A cash back mortgage is a housing loan arrangement wherein the borrower receives a lump sum of cash when finalizing the mortgage agreement. This cash sum is typically calculated as a percentage of the mortgage principal and serves as an incentive or rebate for the borrower. The primary intent behind the inclusion of a cash-back feature is to assist borrowers in covering immediate expenses related to home purchases, including closing costs or other upfront financial needs.

Mechanics of Cash Back Mortgages 

The functionality of Cash Back Mortgages entails borrowers obtaining a one-time cash sum upon completing the loan process, assisting in addressing immediate expenses related to home acquisition. To comprehend the mechanics, it’s essential to analyze the percentage calculation, and potential trade-offs, and assess terms for selecting the most fitting financing alternative.

How cash back mortgages work? 

Cash back mortgages provide borrowers with a lump sum of cash upon taking out the loan, typically a percentage of the mortgage amount. This cash can be used for various purposes, such as covering closing costs or home improvements. However, these mortgages have specific requirements. 

To be eligible for the cashback, borrowers usually need to maintain the mortgage for a specified duration, known as the claw back period. Early termination may result in the obligation to repay a portion or the full cash back amount, with penalties varying among lenders.

The cash back percentage is influenced by factors like mortgage size, term, and lender-specific criteria. Larger mortgages or longer terms may qualify for a higher percentage, and borrowers should carefully review and compare offers to understand the terms and conditions associated with the cash back feature.

Eligibility Criteria for Cash Back Mortgages. 

Eligibility for cash back mortgages is contingent on various factors, with notable emphasis on credit score thresholds and debt-to-income ratios. 

• Generally, a higher credit score enhances the likelihood of approval, showcasing the borrower’s creditworthiness. Lenders often establish minimum credit score requirements, with more favorable terms offered to those with higher scores.
• Additionally, debt-to-income ratios, which assess the proportion of a borrower’s income allocated to debt repayment, are pivotal. 
• While specific criteria differ among lenders, maintaining a solid credit history and a reasonable debt-to-income ratio are fundamental in meeting eligibility requirements for cash back mortgages. Prospective borrowers should thoroughly review and comprehend the lender’s specific conditions before initiating the application process.

Demographics Advantageous for Cash Back Mortgages:

Cash back mortgages offer distinct advantages for specific groups, such as first-time homebuyers and those contemplating refinancing or changing lenders. 

• First-time buyers can leverage the extra cash to handle initial expenses like closing costs or home improvements. 
• For individuals in the process of refinancing or switching lenders, the cash back feature provides financial flexibility, acting as an additional cushion that can make the transition more manageable and potentially reduce upfront costs associated with securing a mortgage. 

In these situations, the cash back feature proves to be a valuable resource, assisting individuals as they navigate the intricacies of home buying or mortgage transitions.

Comparison: Cash Back vs. Traditional Mortgages. 

Let’s dive into it.

Pros of Cash Back Mortgages:

• Liquidity Boost: One major perk is the instant cash infusion you get, handy for covering initial home-related expenses like moving costs or furnishing.
• Financial Flexibility: The extra cash adds a layer of flexibility to your finances, letting you address other financial priorities or investments.
• Reduced Upfront Expenses: Cash back options can potentially lower your initial out-of-pocket expenses, making homeownership more within reach.

Cons of Cash Back Mortgages:

• Higher Interest Rates: Cash back mortgages often come with elevated interest rates compared to traditional mortgages, leading to potentially higher overall payments over the loan’s lifespan.
• Capped Cash Back: Lenders typically limit the cash back amount, which may not cover all your upfront costs, especially in pricier housing markets.
• Risk of Negative Equity: A downturn in the housing market could leave you with a home value less than the total mortgage amount, resulting in negative equity.

Pros of Traditional Mortgages:

• Lower Interest Rates: Traditional mortgages generally offer lower interest rates, potentially saving you money over the entire loan duration.
• Payment Predictability: Fixed-rate traditional mortgages provide stable, predictable monthly payments, simplifying budgeting.
• Accelerated Equity Buildup: With lower interest rates, a higher portion of your monthly payment goes toward paying down the principal, facilitating faster equity buildup.

Traditional Mortgages:

Cons of Traditional Mortgages:

• Higher Initial Costs: A larger upfront sum is typically required for the down payment and closing costs, acting as a potential barrier for some homebuyers.
• Gradual Liquidity: Unlike cash back mortgages, you won’t receive a lump sum upfront, potentially limiting short-term financial flexibility.
• Limited Payment Flexibility: Committing to a traditional mortgage often means fixed monthly payments, offering less flexibility compared to cash back alternatives.

Choosing between traditional and Cash Back Mortgages depends on individual financial goals. Traditional mortgages, with fixed rates, offer stability and predictability, making them ideal for those committed to a property for the long term.

In contrast, unconventional options like adjustable-rate or interest-only loans may suit individuals with shorter-term plans or higher risk tolerance, providing flexibility but requiring careful consideration of potential interest rate changes. Ultimately, tailoring the mortgage choice to specific financial goals ensures a better alignment with individual circumstances.

Banks Offering Cash Back Mortgages in Canada.

Here’s a comparison of cash back mortgage offerings from major Canadian banks:

• National Bank:

• Cash Back: 5.5%
• Max Cash Back: $20,000
• Penalty: Cash lump sum allocation.

• PC Financial:

• Max Cash Back: Unlimited
• Penalty: Locked in for first 3 years, full repayment allowed after 3 years

• TD Bank:

• Cash Back: 4.5%
• Max Cash Back: $25,000
• Penalty: Cash lump sum allocation

• CIBC:

• Cash Back: 2-7%
• Max Cash Back: Unlimited
• Penalty: Full repayment of cash back amount.

• RBC Royal Bank:

• Cash Back: 4-7%
• Max Cash Back: $20,000
• Penalty: Cash lump sum allocation.

• Scotiabank:

• Cash Back: 5%
• Max Cash Back: Not specified
• Penalty: Pro rata repayment of cash back amount

Each bank differs in cash back percentage, maximum amount, and penalty structure. National Bank offers the highest percentage, PC Financial allows unlimited cash back, and TD Bank and RBC Royal Bank specify maximum limits with lump sum penalties. CIBC provides a range of cash back percentages, and Scotiabank allows pro-rata repayment. 

Potential borrowers should review eligibility conditions to find the best fit for their needs.

Benefits of Cash Back Mortgages.

Here are some potential merits to consider:

1. Immediate Monetary Incentive: A key benefit lies in the upfront cash you receive upon closing the mortgage. This can prove particularly useful in offsetting initial homeownership expenses, including moving costs, furniture purchases, or home enhancements.
2. Flexibility in Expenditure: The cash back is typically not designated for a specific purpose, affording you the flexibility to determine how to allocate the funds. 
3. Support for First-Time Homebuyers: For individuals venturing into their initial real estate endeavor, the extra cash can prove invaluable, alleviating the financial pressures linked to the home-buying process.
4. Competitive Interest Rates: Some lenders may extend cash back mortgages with competitive interest rates, enhancing the overall appeal of the mortgage package when compared to alternative financing options.
5. Potential Tax Advantages: Depending on the utilization of the cash back, there may be potential tax benefits. For instance, investing in home improvements can potentially increase the property’s value, and certain expenses may qualify for tax deductions.