We explain the origin of voltage variations due to self-mixing in a terahertz (THz) frequency quantum cascade laser (QCL) using an extended density matrix (DM) approach. Our DM model allows calculation of both the current-voltage (I-V) and optical power characteristics of the QCL under optical feedback by changing the cavity loss, to which the gain of the active region is clamped. The variation of intra-cavity field strength necessary to achieve gain clamping, and the corresponding change in bias required to maintain a constant current density through the heterostructure is then calculated. Strong enhancement of the self-mixing voltage signal due to non-linearity of the (I-V) characteristics is predicted and confirmed experimentally in an exemplar 2.6 THz bound-to-continuum QCL.