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Are cashback mortgages worth it?

A cashback mortgage is where the lender gives you a cash lump sum, usually on completion of the mortgage application. It’s a nice incentive, especially for first time buyers, but is it too good to be true?
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What are cashback mortgages?

A cashback mortgage is exactly as it sounds, it involves receiving a sum of cash from your mortgage lender as an incentive to take your mortgage with them. They are mostly aimed at first-time buyers, but it’s also possible to find home mover and remortgage products with cashback incentives.

As with all mortgage incentives though, the benefits of a cashback mortgage can be cancelled out by a higher interest rate than you could probably get on a mortgage with less incentives.  

£1,000 can be very 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 the cashback are, therefore, generally short term, but can be very useful if you need them towards the costs involved with moving into your new home, such as removal vans and new furniture. 

In the long run, many cashback mortgages fail to stack up against the best rates on the market, so be sure to compare mortgage deals before making your final choice.

Which mortgage could you get?

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

How does a cashback mortgage work?

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 receive the cashback to spend as you please, although some mortgage providers may not give it to you until you’ve made your first monthly mortgage repayment.

Terms to be aware of

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.

There would also be ERCs to consider if you wanted to remortgage before the end of the deal, however, this is true of most mortgages.

Are interest rates higher for a cashback mortgage?

Interest rates vary from one mortgage lender to another, and depending on your personal circumstances, but they are typically higher on a cashback mortgage than on a standard fixed-rate or variable mortgage deal that does not offer any additional incentives.

Should you get a cashback mortgage?

The type of mortgage that is best suited to your needs will depend on your personal circumstances and needs, but it’s important to consider whether you would prefer to have short or long term benefits and whether a cashback mortgage meets this preference.

A higher interest rate could mean that you are 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 potentially paying more for such a long time, and of course, more interest overall.

Of course, if you find a cashback deal at a rate that matches the best deals available to you across the market, then there are very few downsides to accepting a cash boost when buying a new home!

The best way to compare different types of mortgages and which will offer the most benefits overall 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. 

What do you need for a cashback mortgage?

The majority of the criteria you will need to meet will be the same as any other mortgage, such as:

  • Affordability

  • Creditworthiness

  • Deposit availability

  • Age

However, each cashback product may have additional criteria, depending on the lender. For example, some lenders only offer this type of mortgage to those who:

  • Are first-time buyers

  • Hold a bank account with them

  • Borrow a certain minimum amount

  • Are buying a property with a good energy efficiency rating (green mortgages)

How much mortgage cashback can you get?

This will vary depending on the specific deal and could be either a set lump sum of around £200-£1000 or a set percentage of what you borrow. Some even give you your first monthly repayment back.

How do you get the money?

Usually you will get the money via your solicitor when the mortgage application completes or after you’ve made your first repayment. 

With some lenders you can choose to have cashback on 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 will typically need to have a bank account with the lender in order to take advantage.

Mortgage fee refunds

Some cashback mortgages offer discounts and even refunds on certain costs that come up during the home buying process, such as:

  • arrangement/booking fees

  • survey costs 

  • stamp duty

Again, be sure to check that the interest rates match up with the market-leading mortgages to ensure that higher interest rates don’t cancel out the benefits of cashback in the long-term. 

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. 

Pros and cons of cashback mortgages

Pros

  • 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

Cons

  • Interest fees could be higher

  • You may get a better rate elsewhere

  • Restrictions on early repayments

Can you remortgage with a cashback mortgage?

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.

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