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, cashback incentives can often appear on less competitive rates, so check whether in the longer term the deal will work out well for you or not.
Cashback can be offered on all types of mortgage deals, including fixed rate, tracker and discount mortgages. It’s transferred into your bank account as soon as your mortgage deal is finalised. There are no limitations on how the cashback money can be spent, and it’s not taxable.
Nevertheless, before you apply it’s still recommended to weigh up the overall cost of the mortgage during the introductory period. 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.
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, the formula is:
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) at the end of your fixed term.
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.
It’s true that mathematically it doesn’t really make sense: “You want to give me cashback on a loan? But I’m borrowing how much I need to borrow! Just reduce the rate slightly instead!”
But the reality is a bit less black and white.
Firstly from the borrowers’ point of view. You start looking for a house with a particular budget in mind… then you realise that by spending a little bit more you get this and that… then you see an amazing place that’s really out of your budget but maybe you could just about get close…!
Add to this all the extra costs involved with buying a house, and chances are there’s nothing leftover for say, buying a new washing machine, when you finally do get the keys to your new place.
So actually a little cashback at the point of completion can be incredibly helpful for buyers. Technically, borrowers should immediately use that cashback to payoff a tiny extra chunk of their mortgage, but that rarely happens.
Then there’s the lenders’ point of view. They know that people don’t stay with the same mortgage provider for 25 years – it has become a switching game. But they hope you’ll stay with them for a while after your fixed term has ended, because that’s when they’ll really make money out of you. They also hope that maybe you might open other accounts with them at some point. They’ll almost certainly be aiming to cross-sell you some life insurance as you take out your mortgage.
So for the lenders, it’s all about the cost of acquiring a new customer vs the predicted lifetime value of that new customer. And they’re even willing to offer cash upfront when they think it’s worthwhile.
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.
These are:
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.
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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