Cashback mortgages

Cashback mortgages provide you with a single lump sum of cash either immediately on completion of the mortgage transaction or after the first monthly repayment.

The amount of the lump sum is usually calculated as a percentage of the overall loan amount, though it can be a set figure. Some lenders offer a sliding scale of cashback, depending on how long borrowers are willing to tie themselves in to the deal. Although cashback amounts in the region of 1% to 3% are fairly common, the percentage of the loan that is given as cashback can be as high as 10%. Such seemingly great deals don't usually come without strings attached however, usually in the form of very severe early redemption penalties that may well involve the repayment of some, all or even more than the cashback value.

It is quite common to find mortgages that include a relatively small cashback element, possibly in the region of £200 to £300. This can be a cash sum for you to spend as you wish, though it sometimes has a specified purpose, such as covering all or part of your solicitor fees. This type of cashback deal does not usually have such severe penalties and may well not be advertised as a cashback mortgage.

Various different types of rate can come with cashback - capped, discounted, fixed and variable, with cashback products usually available for both mortgages and remortgages. It is not common to associate cashback schemes with UK-based foreign currency mortgages, tracker mortgages or other non-standard loans.

Advantages

Cashback schemes can be useful for buyers who need to have funds available more or less immediately after the mortgage is completed. Although most cashback deals are open to all borrowers, one group with whom they are particular popular is first time buyers. The cashback sum is often used to buy furniture, fittings and other mod cons that they may not already have, or used to cover the cost of stamp duty, surveys, legal fees or other such incidentals.

Disadvantages

The rate of interest is likely to be higher than for non-cashback equivalents, since the lender will seek to recoup the cashback sum over the life of the loan by charging you more for the privilege of borrowing the money. By opting for a cash bonus, you will normally be giving up the option of a competitive fixed rate or a hefty initial discount.

It is often the case that the higher the cashback the less competitive the rate of interest, either during any discount period or once the mortgage reverts to the lender's SVR. The more the lender gives you up front, the more they will need to charge you to make the money back in the long term. When you take into account the build up of interest over time that the higher rate will accrue, this form of mortgage often proves to be relatively inefficient.

Cashback mortgages almost always carry early redemption penalties. If you try to pay off the mortgage within the penalty period, whether by selling your home or remortgaging, you may have to pay a fairly substantial sum of money back to the lender. Some lenders operate a sliding scale of penalties, which decrease each year, or in steps, while others will charge the same penalty for the entire early redemption period.

The size of the cashback sum is often linked to the percentage of the property value that a customer is seeking to borrow. Some of the largest cashback deals are available only to those borrowers with a 75 percent deposit. Where this is the case, it can be cheaper in the long run to go for a more competitive non-cashback loan worth a larger percentage of the property value and hang on to some of the cash that was otherwise earmarked for the deposit. Where a lender operates such an incremental cashback scheme, the same reasoning applies at higher loan-to-value amounts.

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