A cashback mortgage sounds great on paper as a way to receive a bonus sum of money when you are approved for a mortgage. However, it’s important to look carefully at the details to work out whether you’re really getting a good deal. You may be offered £1,000, but if you’re going to pay at least that, or more, in higher interest rates when compared to another mortgage, it’s not worth it. Here we look at exactly how they work and when you should consider one.
Cashback mortgages often come with high interest rates and extra restrictions on repaying early. However, they can be useful to those who could benefit from the extra money.
For many first-time buyers, having extra cash up front can be really useful in helping with the cost of moving home, including for removal vans and new furniture. But in the long run, many cashback mortgage deals fail to 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 deals that pay you for taking out a home loan.
Most cashback mortgages give you the cash up front before you start making your monthly mortgage repayments.
When applying for a cashback mortgage, your lender tells you how much cashback you will get. Once your application is approved, you receive the cashback to spend as you please, although some mortgage providers may not hand over the money until you have made your first monthly mortgage repayment.
However, there are some conditions to consider before taking out a cashback mortgage. These depend on the lender, but could involve it taking back a portion or the full amount of the cashback if you make an early repayment on your mortgage.
During the introductory offer period, which usually lasts between two 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, you just need to watch out for early repayment penalties, which typically cost between 3% and 5% of the amount you overpay.
Similarly, early repayment penalties would apply if you decided to remortgage, which could also eat into (or maybe completely swallow) your cashback.
Before deciding whether a cashback mortgage is right for you, it’s worth looking at the pros and cons.
Upfront cash of up to £1,000
Cashback as a percentage of your mortgage in some cases
Lower mortgage costs
Discounts on home-buying costs
Interest fees could be higher
You may get a better rate elsewhere
Restrictions on early repayments
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.
It’s important to look beyond the cashback at the interest rate you’ll be charged and compare this with other mortgages on the market. When comparing costs, calculate the overall amount you’ll be paying, minus the cashback, to find out which mortgage is best for you.
Some current accounts offer cashback on your monthly mortgage repayments. These usually apply to customers who have a mortgage and a current account with the same bank.
This is another incentive by banks to encourage customers to do all their banking with them. However, while the cashback may be tempting, you need to compare the cost with other mortgages on the market before you make a decision. The cashback could potentially save you hundreds of pounds on your mortgage every year, because it is usually offered as a percentage of what you pay.
You just need to make sure 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 home-buying process.
These offers include discounts and refunds on booking fees, survey costs 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 takes many years to pay off, and you could be losing out, even despite the initial savings, by paying too much in interest overall.
Some mortgage providers offer a discount if you use their recommended providers of insurance, survey and legal services, but be wary of this and check that it’s a good deal. As a rule, do your own research first, even if the discount is tempting.
You should always make the overall repayments 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 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 home-buying process.
Some remortgage products have cashback available. But, again, don’t let this blind you, because the interest rate might be higher than for non-cashback deals.
Looking at the interest rate or annual percentage rate (APR) is always the best way to compare mortgages. The lower the rate, the less you pay on your monthly mortgage repayments.
Most mortgages 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 stays the same despite any changes to the bank rate) or variable (meaning it can fluctuate), and usually lasts 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, then working out how much you would pay when you move to the SVR.