Cashback Mortgages: When a Higher Rate and Clawbacks Outweigh the Upfront Rebate
Most people who take a cashback mortgage never ask the one question that decides whether it was a good deal: what rate would I get without the cheque? The rebate lands in your account around closing, right when legal fees, land title charges and moving costs hit. In Alberta those closing costs often run 1.5% to 2% of the purchase price, so a rebate of the same size feels like the problem solved.
The lender is getting that money back. Cashback mortgages usually carry a fixed rate above the lender's best offer, and if you break the mortgage early you typically repay part of the rebate. Whether the cheque helps you or costs you comes down to a few numbers you can check before you sign. Here's the list.
Ask for the no-cashback rate in writing. Lenders run cashback through spring campaigns and lead with the dollar figure. Request both quotes side by side, same term, same lender. People skip this because the cheque is the only number on the page.
Multiply the rate gap by your balance. Take an illustrative $400,000 mortgage on a five-year fixed term with a 25-year amortization. A 0.25-point premium costs about $1,000 in the first year and around $4,600 over five years as the balance shrinks. Against a 2% rebate of $8,000, that works if you stay the full term. Against a 1% rebate of $4,000 with a 0.30-point premium (about $5,600 over five years), you've paid more than you received. And because the rebate is folded into your rate, you're paying interest on money the bank handed you up front.
Read the clawback clause before anything else. Breaking a cashback mortgage early usually means repaying a prorated share of the rebate. As an example, take $10,000 back and leave at year three of five, and you may owe around $4,000, on top of the normal prepayment penalty. A higher rate also makes that penalty bigger. On a variable mortgage it's three months' interest, calculated at your higher rate.
Be honest about how long you'll keep this mortgage. Move-up buyers, growing families and investors who plan to refinance to buy their next property break terms more often than they expect. The advantage of cashback can disappear well before the term ends if the premium is meaningful, and the clawback acts as an exit fee that can keep you in a higher-rate mortgage when a better option comes along.
Check how the higher rate affects your qualifying. You must qualify at the higher of your contract rate plus 2 percentage points or 5.25%. Once your contract rate is above 3.25%, every bit of premium raises your qualifying rate too, which can trim what you're approved for. People rarely connect a cashback offer to their purchase budget.
Price the cash against what you'd actually do without it. Sometimes the rebate is the cheaper money. If $5,000 keeps you from putting furniture on a high-interest credit card, a mortgage rate a quarter point higher wins easily. Buyers in new Edmonton communities like Chappelle or Heritage Valley often face landscaping and window coverings that aren't in the base price. Self-employed buyers may prefer to keep working capital in the business. Investors can generally deduct mortgage interest on a rental, which softens the premium somewhat. In each case, compare the rebate to your real alternative, not to zero.
Keep your down payment separate from the rebate. On an insured mortgage, the minimum 5% down has to come from your own savings and be in place before the mortgage funds. Cashback arrives afterward, so it can top up your cushion but can't get you in the door.
Hold any cashback offer up to one test: rebate minus the extra interest over the years you'll realistically stay, minus whatever you'd repay if you left early. If that number is clearly positive for your plans, take the cheque. If it's close, the lower rate is usually the safer choice.
Most people who take a cashback mortgage never ask the one question that decides whether it was a good deal: what rate would I get without the cheque? The rebate lands in your account around closing, right when legal fees, land title charges and moving costs hit. In Alberta those closing costs often run 1.5% to 2% of the purchase price, so a rebate of the same size feels like the problem solved.
The lender is getting that money back. Cashback mortgages usually carry a fixed rate above the lender's best offer, and if you break the mortgage early you typically repay part of the rebate. Whether the cheque helps you or costs you comes down to a few numbers you can check before you sign. Here's the list.
Ask for the no-cashback rate in writing. Lenders run cashback through spring campaigns and lead with the dollar figure. Request both quotes side by side, same term, same lender. People skip this because the cheque is the only number on the page.
Multiply the rate gap by your balance. Take an illustrative $400,000 mortgage on a five-year fixed term with a 25-year amortization. A 0.25-point premium costs about $1,000 in the first year and around $4,600 over five years as the balance shrinks. Against a 2% rebate of $8,000, that works if you stay the full term. Against a 1% rebate of $4,000 with a 0.30-point premium (about $5,600 over five years), you've paid more than you received. And because the rebate is folded into your rate, you're paying interest on money the bank handed you up front.
Read the clawback clause before anything else. Breaking a cashback mortgage early usually means repaying a prorated share of the rebate. As an example, take $10,000 back and leave at year three of five, and you may owe around $4,000, on top of the normal prepayment penalty. A higher rate also makes that penalty bigger. On a variable mortgage it's three months' interest, calculated at your higher rate.
Be honest about how long you'll keep this mortgage. Move-up buyers, growing families and investors who plan to refinance to buy their next property break terms more often than they expect. The advantage of cashback can disappear well before the term ends if the premium is meaningful, and the clawback acts as an exit fee that can keep you in a higher-rate mortgage when a better option comes along.
Check how the higher rate affects your qualifying. You must qualify at the higher of your contract rate plus 2 percentage points or 5.25%. Once your contract rate is above 3.25%, every bit of premium raises your qualifying rate too, which can trim what you're approved for. People rarely connect a cashback offer to their purchase budget.
Price the cash against what you'd actually do without it. Sometimes the rebate is the cheaper money. If $5,000 keeps you from putting furniture on a high-interest credit card, a mortgage rate a quarter point higher wins easily. Buyers in new Edmonton communities like Chappelle or Heritage Valley often face landscaping and window coverings that aren't in the base price. Self-employed buyers may prefer to keep working capital in the business. Investors can generally deduct mortgage interest on a rental, which softens the premium somewhat. In each case, compare the rebate to your real alternative, not to zero.
Keep your down payment separate from the rebate. On an insured mortgage, the minimum 5% down has to come from your own savings and be in place before the mortgage funds. Cashback arrives afterward, so it can top up your cushion but can't get you in the door.
Hold any cashback offer up to one test: rebate minus the extra interest over the years you'll realistically stay, minus whatever you'd repay if you left early. If that number is clearly positive for your plans, take the cheque. If it's close, the lower rate is usually the safer choice.
Sources
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