Cashback mortgages pay you a cash bonus to help with the costs of purchasing a property, but that doesn't necessarily make them the best choice.
The bonus of a cash payment from your mortgage provider could certainly prove appealing, especially when you consider all the one-off costs associated with buying a house.
However, it’s common that cashback incentives are only used in an attempt to mask uncompetitive deals.
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Are cashback mortgages worth it?
It’s transferred into your bank account as soon as your mortgage deal is finalised. There are no limitations on how the money can be spent, and it’s not taxable.
Nevertheless, it’s still recommended to weigh up the overall cost of the mortgage during the introductory period.
If you’re comparing two-year fixed rate mortgages, this calculation will help you.
Mortgage fees + 24 monthly payments – cashback = overall cost
For a five-year fixed-rate mortgage, it’s:
Mortgage fees + 60 monthly payments – cashback = overall cost
These calculations assume you’re planning to remortgage before being switched to the lender’s standard variable rate (SVR). Often, there will be deals available with lower interest rates and lower fees that’ll save you more money, even when the cashback is considered.
What is the typical amount of cashback you could get?
In 2018, there were mortgages available offering up to £1,500 cashback. Several providers were offering £1,000 cashback, while many more were offering £500 cashback.
It’s common that the best cashback deals are only available on mortgages with a lower loan-to-value.
Pros and cons of cashback mortgages
- A cash bonus paid directly into your bank account
- Paid as soon as your mortgage completes (when you’re usually short of spare cash)
- Non-taxable income
- Usually only added to inferior mortgages
Alternatives to cashback mortgages
It’s common for homebuyers to be short of money as soon as their mortgage is finalised. However, it’s rarely worth choosing an inferior mortgage to fix this problem.
There are a couple of government products that were designed to help financially struggling first-time buyers onto the property ladder quicker.
- Help To Buy Equity Loan. With this scheme, the government will lend you up to 20% of your desired property’s value to add to your mortgage deposit. It’s only available on certain properties, you’ll pay interest on this loan after five years and will have to pay it back in full when you sell the house.
- Help To Buy Isa/Lifetime Isa. These Isas are designed for people saving for a mortgage deposit. If you put the funds saved in this Isa towards a mortgage, the government will top them up by 25% (although there is a cap to the maximum you can deposit in these accounts each month, and the maximum bonus you can receive).
There are several terms associated with these products, which you’ll need to understand before applying. Nevertheless, by taking advantage of them, you may have more cash spare to fund the other costs associated with buying a house.
The bottom line
Cashback mortgages appeal to the widespread desire for extra cash in the weeks after completing your mortgage. However, getting your hands on this bonus often comes at the cost of a superior mortgage deal.
Usually, this bonus only serves as a carrot on a stick, designed to sway people with poor knowledge of the mortgage market.
Always calculate the overall cost of a mortgage before making a decision on the most suitable deal for you.
If you have to wait a couple of extra months to save for the additional costs of buying a home, it’s likely to be worth doing so. A professional mortgage adviser can help you find the best deal that you’re likely to be approved for.
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