Are you ready to buy a home but feeling stretched a little too thin? Between gathering your down payment, tackling closing costs and managing the expenses of moving into your new place, it can feel like the bills are stacking up faster than you can keep track. That’s where a cashback mortgage might come in handy.
What is a cashback mortgage?
A cashback mortgage is when your lenders offer a lump sum of cash based on the percentage of your mortgage amount once your term begins. This additional money can be used to help cover expenses like closing costs, renovations or even new furniture. While you can’t apply it toward your down payment, a cashback mortgage can ease some of the financial pressures that come with buying a home.
However, a cashback mortgage isn’t free money. It certainly comes with trade-offs – one of them being higher interest rates. You’ll be paying a premium for that upfront cash, so it’s important to weigh the advantages and disadvantages carefully.
How does a cashback mortgage work?
Once a cashback mortgage closes, your lender provides a lump sum based on a percentage of your mortgage – typically up to 7%, depending on the lender. For example, if you have a $475,000 mortgage and your lender offers you 2% cash back, you'll receive $9,500 when the deal is done. However, only your original mortgage of $475,000 will be registered.
This type of mortgage can be particularly useful if you have enough for the down payment but need extra cash for other immediate expenses like renovations, moving costs or paying down high-interest debt before your mortgage payments kick in.
Who qualifies for a cashback mortgage?
Like any loan, cashback mortgages come with some requirements. Most lenders will only offer this option if:
- You have a steady salary or hourly income (self-employed individuals often don’t qualify)
- Your credit score is 650 or higher
- Your debt-to-income ratio is relatively low
- You plan to live in the home (no renters allowed)
It’s also important to note that you’ll need to visit a traditional bank or credit union for a cashback mortgage, as private lenders typically don’t offer this option.
What are the pros and cons?
Before getting too excited about receiving extra cash from your lender, it’s important to weigh the pros and cons to ensure this option makes sense for your situation.
| Pros | Cons |
| Instant Financial Relief: Whether you need to cover closing costs, moving expenses or a fresh coat of paint for your new place, having that extra cash upfront can help alleviate the financial pressure of buying a home. | Higher Interest Rates: Cashback mortgages typically come with higher interest rates, which means you’ll end up paying more in the long run. Lenders will either charge you their posted rate or their discounted rate, plus an additional 1% to 2%. |
| Flexibility: You can use the cashback amount as you see fit – whether it’s furnishing your new place, paying down debt or even completing some much-needed renovations. | Prepayment Penalties: If you decide to break your mortgage before the term ends, you might have to pay back some or all of the cashback amount, adding to the cost of early termination. |
| Enhanced Homebuying Experience: With a little extra financial breathing room, your home buying process might feel smoother and less stressful. | Limited Eligibility: If you're self-employed, this type of mortgage may not be available to you. |
| Not Available for Variable Rate Mortgages: Cashback mortgages typically only apply to fixed-rate mortgages, limiting your options if you prefer a variable rate. |
Is a cashback mortgage right for you?
A cashback mortgage can be a great option for first-time buyers who are struggling with upfront costs but are willing to accept a slightly higher interest rate for the convenience of having more cash on hand at closing. Just make sure you consider the long-term financial implications. If you plan on staying in your home for the full term of your mortgage, the higher interest rate might be worth the upfront financial relief. However, if you think there’s a chance you’ll break your mortgage early, you could face significant penalties, making this option less appealing.
If you need help deciding whether a cashback mortgage is the right option for you, Homewise is here to help. Consider speaking with one of our mortgage experts who can walk you through your options and help you make the best choice for your financial situation.
