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Are cashback mortgages worth it?

Cashback mortgages will give you cash lump sum when you successfully apply for one, however catches do apply, so make sure you know what to look out for.

Cashback mortgages are one of the many headline incentives lenders are using to try to entice customers, but while the up front 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.

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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 up front 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.

What are cashback mortgages?

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 that cash back, but most cashback mortgage deals will give you the cash up front before you start making your monthly mortgage repayments.

How does the cashback from a mortgage work?

When applying for a cashback mortgage, they 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 being that any early repayment penalties could 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 charge you a fee of around 3% or 5% of the amount you overpaid by.

Similarly, early repayment penalties would apply if you decided to remortgage, which could also eat into (maybe even swallow) your cashback.

What’s a typical amount of cashback you could get?

Generally, cashback mortgages are offering 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.

Getting cashback on your monthly repayments

Some current accounts offer cashback on your monthly mortgage repayments. These usually only apply 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 of their banking with them. As a result, the rates may not be as good as the market leading mortgages, but 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 if you were able to get a mortgage on a cheaper interest rate, that you wouldn’t be saving more.

Fee refunds and mortgages

Some mortgages offer discounts and even refunds on certain inevitable costs that come up during the application and home buying process.

These offers range from discounts and refunds on the booking fee, surveying 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 simplifying paying too much interest.

Some mortgage providers will offer you a discount to use their recommended providers of insurance, surveying 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.

Should you take cashback into consideration when comparing mortgages?

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, then 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 home buying process.

A cashback mortgage could help you save on some of those costs, but therefore 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. In 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.

Comparing mortgage rates

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 their ‘Standard Variable Rate’ (SVR), which is essentially their current interest rate. 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 will fluctuate according to the bank rate) 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.

Read more…

  • Is remortgaging worth it? Remortgaging can be an effective way to save money on your monthly mortgage repayments, but it can be hard to work out whether or not it is actually worth it in the long run.
  • Fixed Rate Or Variable Rate Mortgages Choosing between a fixed and a variable rate mortgage is one of the most fundamental decisions faced by homeowners
  • How to get a second mortgage Just as the name suggests, a second mortgage, is a separate mortgage taken out, leaving you with two concurrent mortgages to pay off.

Which mortgage could you get?

Compare a huge range of mortgages of all types on our comparison tables.

Compare mortgages