Cashback mortgages
When comparing mortgage options, most attention is usually placed on interest rates and monthly repayments. However, some lenders turn this on its head by offering money back to the borrower. Cashback mortgages are a legitimate feature of the UK mortgage market and are designed to provide extra funds at one of the most expensive points in the homebuying process.
With this type of mortgage, the lender pays you a cash sum as part of the deal. This payment is usually released at completion, when you receive the keys, or shortly afterwards. Once paid, the money is yours to use as you see fit.
For many buyers, this extra cash can help ease the pressure of moving costs, which often arrive all at once. It can be used to cover expenses such as legal fees, Stamp Duty Land Tax, removal costs, surveys, or even essential furnishings and early improvements.
How cashback amounts are worked out
The amount you receive varies depending on the lender and the specific mortgage product.
In most cases, cashback is offered in one of two ways.
Fixed cashback amounts
Many lenders provide a set sum, such as £250, £500, or £1,000. This figure does not change based on the size of your mortgage and is agreed upfront.
Percentage-based cashback
Less commonly, cashback may be calculated as a percentage of the mortgage amount. For example, a 1% cashback offer on a £200,000 mortgage would result in £2,000 being paid to you. While rarer, these deals can be more attractive for larger loans.
Some lenders may also require you to hold, or open, a current account with them in order to qualify for certain cashback offers.
Understanding the trade-offs
Although cashback can be appealing, it is important to consider the overall cost of the mortgage. Lenders typically recover the cost of cashback through other elements of the deal.
Cashback incentives are often linked to particular mortgage types, such as tracker or standard variable rate products, though fixed-rate cashback deals do exist. In some cases, the interest rate on a cashback mortgage may be higher than a similar product without the incentive.
It is worth comparing the long-term cost carefully. A higher interest rate could outweigh the upfront benefit. For example, paying an additional £50 per month over two years would total £1,200, which would exceed a £500 cashback payment.
Early repayment charges and clawback clauses
Cashback mortgages can come with tighter restrictions if you want to leave the deal early. Because the lender has paid money upfront, they often include early repayment charges if you repay the mortgage or switch deals before the agreed period ends.
Some products also include a cashback clawback clause. This means you may be required to repay part, or all, of the cashback if you exit the mortgage within a specified timeframe.
Who cashback mortgages tend to suit
Cashback mortgages can be particularly helpful for first-time buyers or anyone whose savings are stretched by upfront moving costs. The additional funds can provide breathing space at a time when expenses are highest.
However, if you already have sufficient savings to cover fees and furnishings, a mortgage with a lower interest rate and no cashback may be more cost-effective over the longer term.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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