Cashback down payment mortgages are on the endangered list.

One of the biggest remaining lenders with a cashback down payment mortgage is Scotiabank, which announced today that it is terminating its “Free Down Payment” program, effective September 15.

A source at the bank confirms that it is scrapping the offer in light of banking regulator OSFI’s B-20 Underwriting Guidelines.

OSFI has decreed that “Cashback should not be considered part of the down payment.” Most Federally regulated lenders must therefore eliminate these offerings no later than October 31, 2012.

Cashback mortgages – essentially 100% financing – are a niche product that are seldom appropriate for owner-occupied purchases (sometimes they make sense for rentals). There are exceptions, but most of the folks who want them are simply a bit too eager to buy.

The Canadian Association of Accredited Mortgage Professionals (CAAMP) supports OSFI’s call to end cash back products in lieu of 5% down payments. “Borrowers should have ‘skin in the game’,” it says.

There aren’t many federally-regulated lenders with 5% cashback down payment mortgages left. Last time we checked, National Bank and B2B Bank were two of the banks still doing them. Those options likely won’t be around for long.

Despite the above, banks (including Scotiabank) will continue selling cashback mortgages so long as the funds aren’t being used as equity. Buyers sometimes use cash back for things like land transfer tax, lawyer’s fees, moving costs, closing costs, furnishings, landscaping, renovations, and so on.

Cashbacks are also used for refinances to 85% loan-to-value (the official refinance limit without cash back is 80% LTV on insured mortgages).

Sidebar: There’s a chance that a small number of provincially regulated lenders will continue offering cashback down payment mortgages. We’ll see who’s left standing after October 31.

Rob McLister, CMT