Guide to cashback mortgages
- Cashback mortgages can offer a cash bonus when taking out a mortgage, but they may not offer the best rate
- You may need to hold a current account with the mortgage provider to take out a cashback mortgage
- London & Country's fee-free, expert advisers can help you find lenders that may be able to arrange a mortgage swiftly for your purchase - request a call back or phone 0800-073-1959
If you're buying a property and you're on a tight budget, the idea of getting free cash can be tempting - especially when you need money to buy essentials for your new home.
Mortgages that offer free cash may seem perfect, but they may not necessarily offer the best rate.
This type of mortgage - along with fee-free mortgages - appeal especially to first-time buyers who are keen to save every penny, but they may not be as good as they seem.
What is a cashback mortgage?
Cashback mortgages offer buyers a cash bonus for taking out their product and they may seem appealing, especially when you consider the fact that you're getting cash for something you have to take out any way.
Cashback sums can vary from a few hundred to several thousand pounds, and the money is usually paid once the mortgage has begun or a few months in to the term.
In the past cashback mortgages referred to a deal that was structured as a standard variable rate but then gave the borrower a percentage of the mortgage balance back as a cashback, said David Hollingworth from London & Country.
"This type of deal fell from favour as a standard discounted deal would typically offer better value by discounting the rate more heavily," said Hollingworth.
Now cashbacks will tend to be offered as an incentive as part of the package.
"That may be a relatively small sum of £200-£250 which can be helpful as a way of covering some costs, for example basic legal work for a remortgage.
"Others may be more substantial such as £750-£1,000 or 1% of the balance (up to a certain amount).
"That may be designed to cover more significant costs, for example stamp duty, and to help certain types of buyer such as a first time buyer."
Meeting conditions for cashback mortgages
Before taking out a cashback mortgage, be aware that there may be conditions you need to meet first. For example, some mortgage lenders may insist that you hold a current account with them before getting any cashback. You may also have to hold the mortgage for a certain amount of time, before you can claim the money.
Make sure to check the terms and conditions of any deal before signing, so you're not left disappointed.
A mortgage adviser will be able to go through any conditions with you and will check you can qualify before choosing a deal.
Whether or not you should opt for a cashback mortgage depends on your circumstances.
Cash lump sum
A cash lump sum isn't to be sniffed at. Cashback is useful for a myriad of things, from paying for fees and moving costs to kitting out your home with the essentials.
Hollingworth said: "Just as fees need to be factored into the overall value of the deal so cashbacks can offer a useful reduction in overall set-up costs.
"They should therefore definitely be factored in and even though the rate may be a touch higher they can be a valuable incentive and could make it better all-round than what may initially look like a cheaper rate."
Disadvantages of a cashback mortgage
There are a number of drawbacks to taking out a mortgage with cashback.
Higher interest rates
When you're looking at mortgages you need to take lots of different things into account; the interest rate, fees and the length of the deal.
While cashback mortgages may be tempting, sometimes they can be hiding the fact that the mortgage itself has a less-than-competitive interest rate.
If a mortgage has a higher interest rate than others you could take out you'll end up with higher monthly payments and the mortgage may cost more overall.
Depending on the amount of the lump sum however, it may work out cheaper - do your sums to find out or speak to a mortgage adviser.
A cashback bonus may also be compensating for large fees, which cancel out the bonus. Look around and do the sums - you may be better off taking out a fee-free mortgage with no cashback.
Speak to an adviser
Before you decide to opt for a cashback mortgage, it may be worth speaking to a mortgage adviser - they'll be able to help you decide what kind of mortgage is best for your needs.
Contact London & Country on 0800-073-1959 for fee-free advice on mortgages from a wide range of UK providers - they'll be able to help you with the sums to see if a cashback product offers the best value for you.
By Emily Bater