A “cash back” mortgage is a specialty product that lenders offer to assist people who need money to enter the housing market or to help with cash flow issues. “Cash back” mortgages, when first introduced, offered one percent of the total mortgage back in the form of a cash payment at the time of closing.

But now consumers can get up to seven per cent of the total mortgage in a “cash back” product. Since the “cash back” is paid up front to the borrower there is additional risk and cost to the lender for this product. The additional risk and costs are reflected in the increased interest rate the lender charges for a cash back mortgage.

There are cases where  a “cash back” mortgage works nicely for a client. If a house needs immediate upgrading, such as a new roof, a basement renovation or an additional bedroom, it could be a better deal to arrange a “cash back” mortgage rather than using a credit card or borrowing the money separately to finance the upgrade. Interest rates for “cash back” mortgages have a premium over the best residential mortgage rates however are usually less than separate consumer loan or credit card rates charged by the banks.

A “cash back” mortgage can work against a customer if he or she should decide to refinance or sell the property during the term of the mortgage. Should the original conditions of the mortgage change (ie the term or amount) the lender will expect to be repaid by the borrower for the portion of the cash back that was advanced based on the original mortgage contract. Generally speaking if a customer is one year into a five year term and wants to payout or renegotiate the mortgage the lender will “claw back” 80 per cent of the amount of the “cash back”, after two years the “claw back” would be 60 per cent and so on.

Cash back products are definitely not for everyone.  If you are contemplating a cash back mortgage be sure to think about your long term plans and have your mortgage Agent explain both the benefits and disadvantages of this type of mortgage. You should also have your mortgage agent show you comparisons of the best residential rates versus the rates charged for a “cash back” product and provide a forecast of the interest cost differences over the term of the mortgage you are contemplating.

Cam Brown is a licensed Mortgage Agent with Invis Financial and has been designated an “Accredited Mortgage Professional” by his Industry. Mr. Brown has over 20 years of banking and mortgage brokering experience and is a financial services expert. Mr. Brown is also a member of the Canadian Institute of Mortgage Brokers and Lenders (CIMBL) and the Alberta Mortgage Brokers Association. Mr. Brown may be reached at (403) 515-1171 or via email at .(JavaScript must be enabled to view this email address)