Currently in Ontario, one must put minimum 5% of the purchase price as a down payment in order to purchase a home in which the borrower will live.

However, if you don't have that 5% available, banks may agree to lend it to you, in effect providing you with a loan equivalent to the entire purchase price (so-called 100% financing). This 5% portion of the mortgage is called a "cash back".

In the situation where you don't have any down payment available from your own resources and you are taking the 5% cash back mortgage, you will never actually see any of that 5% despite that fact that it is called a "cash back". It will be used as a down payment on your purchase.

However, if you do have the down payment available but are concerned about the fact that once the purchase closes you will have no money left for anything else (e.g. furniture, new appliances, etc.), you may also opt for a cash back mortgage, in which case you will actually receive the funds back from the bank and then can use it for anything you wish.

Let's not get fooled, however. Most of us know that there are not many things in this world that are free and certainly banks are not on top of the list of giving away free cash.

When you put the required minimum 5% down payment (or more), you will most likely get a mortgage which will not carry something called a posted interest rate. You will be able to negotiate your interest rate well below the bank's posted rate (usually about 1% below). If you use services of one of our mortgage professionals, that discount will be even deeper (this is another advantage of using our services).

However, with cash back mortgages there is no such thing as negotiating the interest rate. Whether you go through a broker or directly with the bank, you will have to pay the posted interest rate on your mortgage and this is how the banks will get their money back, by charging you a much higher rate than they would otherwise, if you did not take a cash back mortgage.