I'm assuming this is a limitation more than a 'bug' or mistake of some kind.

The problem I'm having is that kate makes backup files (*~) but it's making them on a super slow remote connection via sshfs. I'm guessing it's because the sshfs mount appears as a local filesystem to kate.

For the time being I'm turning off backups and then turning them back on when I'm done with a remote file. Is there an easier way (automated) to do this or some kind of workaround for making kate realise the mount point is remote?

Using either the sftp:// or fish:// protocols to access your files will let Kate know they are remote files. Files mounted using sshfs do appear as local files to Kate.