Cashback mortgages are one of the many headline incentives lenders are using to try to entice customers, but while the upfront cash of anything between £200 and £1,000 can be tempting, often the deals do not work out to be quite as good as they look.
Cashback mortgages often come with interest rates slightly higher than the regular mortgage deals on the market. Many of them also come with extra restrictions on making early repayments. However, they can be useful to those who could benefit from the extra money.
For many first time buyers, having extra cash upfront can be really useful in helping with the various moving costs and with buying furniture. But in the long-run, many of the cashback mortgage deals do not stack up against the best rates on the market, so it comes down to what works for you.
Cashback mortgages, as the name suggests, are mortgages that give you cash simply for taking out the mortgage.
Some will have different stipulations for how you get the cashback, but most cashback mortgage deals will give you the cash up front before you start making your monthly mortgage repayments.
When applying for a cashback mortgage, your lender will tell you how much cashback you will get after completing the application and beginning your mortgage repayments.
Once your application is approved you will receive the cashback to spend as you please, although some mortgage providers may wait until you make your first monthly mortgage repayment.
However, there are some stipulations to consider before taking out a cashback mortgage. The key one is that any early repayment penalties could involve the lender taking back a portion or the full amount of the cashback you received.
During the introductory offer, which usually lasts somewhere between two years and five years, you will probably have tighter restrictions on your mortgage overpayments (the market standard is around 10% of the mortgage value).
If this isn't the case then you just need to watch out for the early repayment penalties, which will typically charge you a fee of between 3% or 5% of the amount you overpay by.
Similarly, early repayment penalties would apply if you decided to remortgage, which could also eat into (or maybe completely swallow) your cashback.
Generally, cashback mortgages offer between £200 and £1,000. Some lenders might give you a percentage of the mortgage offer, which could lead to a much higher amount of cashback.
Most importantly, compare the interest rate against other deals and calculate how much you could save by going with a different mortgage.
The introductory periods are likely to be comparable as most of the mortgages offer deals lasting for two years or five years, so you will be able to see which one is better value for money.
Some current accounts offer cashback on your monthly mortgage repayments. These usually apply only to customers who have a mortgage with the same bank they have their current account with.
This is another incentive by banks to encourage customers to do all their banking with them. As a result, although the rates may not be as good as the market-leading mortgages, they are definitely worth considering.
The cashback could potentially save you hundreds of pounds on your mortgage every year, as it is usually offered as a percentage of what you pay.
You just need to make sure that you wouldn't be saving more if you were able to get a mortgage with a cheaper interest rate.
Some mortgages offer discounts and even refunds on certain costs that come up during the application and homebuying process.
These offers include discounts and refunds on booking fees, survey fees and even stamp duty.
Again, be sure to check that the interest rates are still matching up with the market-leading mortgages. You may save a few thousand pounds at the beginning, but a mortgage will take several years to pay off, and you could be losing out, even despite the initial savings, by paying too much interest.
Some mortgage providers will offer you a discount to use their recommended providers of insurance, survey and legal services, but be wary of this and check it's a good deal. As a rule, do your own research first, even if the discount is tempting.
You should always make the interest rate the most important consideration when comparing mortgages. Cashback should be a secondary consideration.
If, after all the calculations, you believe you will be paying a similar amount to the market-leading mortgages, the cashback will certainly be a welcome bonus at the start of your mortgage.
The cashback can also be a consideration when looking at the other short-term costs and issues with a mortgage, such as the set-up fees and administration costs of completing the homebuying process.
A cashback mortgage could help you save on some of those costs, but you should see them as almost directly comparable with the mortgages that offer discounts and refunds on the initial set-up fees.
Ultimately, it comes down to short-term versus long-term benefits and drawbacks.
Over the long term you want to be paying as little as possible as you cannot predict the state of your finances or your personal circumstances.
In the short term, you want to have some money left over to pay for many of the fees associated with buying a home, but this should never be at the cost of your long-term mortgage goals.
Some remortgage products will have cashback available. But, again, don’t let this blind you because the interest rate might be higher than non-cashback deals.
Looking at the interest rate or APR is always the best way to compare mortgages. The lower the rate, the less you will pay on your monthly mortgage repayments.
Most mortgages will offer a special introductory deal that gives you a lower interest rate than the standard variable rate (SVR). However, the SVR is subject to change based on market factors and the Bank of England's interest rate.
The introductory rate you receive can be fixed (meaning it will stay the same despite any changes to the Bank rate) or variable (meaning it can fluctuate), and will usually last for two or five years.
You can compare mortgage rates by calculating how much you would be paying over that period with one deal over another, and then calculating how much you would then pay once you moved over to the SVR.