A cashback mortgage is exactly as it sounds, you get cash back from your mortgage lender as an incentive to take your mortgage with them. They are mostly aimed at first-time buyers, but it’s possible to find home mover mortgages and remortgage products with cashback incentives.
As with all mortgage incentives though, the benefits of a cashback mortgage may be cancelled out by a higher interest rate than you would probably get on a mortgage without incentives.
£1,000 can be appealing when you’re in the midst of the home buying process with multiple expenses to cover, but paying a higher interest rate for the full duration of the mortgage is likely to result in paying more overall.
The benefits of mortgage cashback are, therefore, generally short term, but can be very useful towards the long list of costs involved in buying a home.
Cashback mortgages usually don't offer the best rates on the market, so be sure to compare mortgage deals before making your final choice.
When you apply for a cashback mortgage, your lender will tell you how much cashback is available and this is usually a set lump sum, but can also be based on the cost of your mortgage.
Once your application is approved, you'll usually receive the cashback to spend as you please. Some mortgage providers may not give it to you until you’ve made your first monthly mortgage repayment, but this should be made clear to you when you sign up.
When you accept cashback as part of a mortgage deal you’re typically agreeing to additional terms. These can vary from lender to lender, but will generally include having to repay some or all of the cashback if you leave the mortgage before the deal ends.
You may also have less flexibility to overpay your mortgage, particularly in the introductory period. Most mortgages allow for 10% overpayment of your mortgage per year, but this could be less with a cashback deal, so be aware of any limits imposed.
Early repayment charges (ERCs) can be as much as 3-5% of the amount you’ve overpaid by, so you could end up cancelling out any benefit gained through the cashback if you end up having to pay them.
Interest rates vary from one mortgage to the next, and depending on your personal circumstances, but cashback mortgage rates are usually higher than standard fixed-rate or variable mortgage deals that offers no incentives.
The type of mortgage that's best suited to your needs depends on your personal circumstances and needs. It’s important to consider whether you'd prefer to have short or long term benefits, however.
A higher interest rate could mean that you're paying more over the full length of the mortgage term (an average of 25-30 years), so you’ll need to ask yourself whether £1000 now is worth higher repayments for such a long time, and of course, paying more interest overall.
If you find a cashback deal at a rate that matches the best deals available to you across the market, there are very few downsides to accepting a cash boost when buying a new home!
The best way to compare different types of mortgages is to use the annual percentage rate of charge (APRC). Every lender has a legal responsibility to show this, and it will tell you the total cost of your mortgage over the whole term, taking all incentives into account.
This depends on the specific deal. Set lump sums tend to fall between £200-£1000 or you might be offered a set percentage of what you borrow back. Some lenders refund your first monthly repayment instead.
Some cashback mortgages offer other discounts or refunds on specific mortgage costs, rather than offering a cash lump sum. This could include:
Fee-free, reduced or refunded arrangement or booking fees
Fee-free, reduced or refunded survey costs
Fee-free, reduced or refunded legal fees
Fee-free, reduced or refunded stamp duty
Some mortgage providers also offer a discount if you use their recommended insurance providers, surveyors and legal firms. However, it can be cheaper to source all of these services elsewhere, your lender won’t necessarily have the best deals on the market.
Usually the money is passed via your solicitor when the mortgage application completes or once you’ve made your first mortgage repayment.
Some lenders might let you choose to take the cashback off of your monthly repayments instead of as a lump sum. This option could potentially offer a much greater financial benefit than the lump sum, but you'll typically need to have a bank account with the lender in order to take advantage of this type of deal.
Upfront cash of up to £1,000
Cashback as a percentage of your mortgage in some cases
Can be helpful to pay for the costs of moving home
You may also get extra benefits such as refunds on stamp duty, valuation or legal fees
Interest rates are typically higher than on non-cashback deals
Early repayment charges can be higher, so your benefits could be wiped out if you remortgage or overpay your mortgage during the term of the deal
Some remortgage products have cashback available. But, again, the interest rate might be higher than for non-cashback remortgage deals, so always make sure you're looking at the APRC to make a final decision.
It depends on the individual deal terms, but usually on completion of the mortgage, or once you've made your first monthly mortgage repayment. Be sure that this is made clear to you in the terms.
If you meet the criteria for the cashback, then you should be entitled to it when you take out a cashback mortgage. However, do be careful to read the terms and conditions as some may require you to bank with the lender, borrow a certain amount of money or be a first-time buyer in order to qualify.
There are no additional fees on a cashback mortgage compared to any other residential mortgage product. However, be aware that any mortgage with built-in incentives, such as cash back or free legal fees, typically have slightly high rates of interest. Be sure to consider which will benefit you most in the long term.