Are Enticing Lender Cashback Mortgage Deal Right for You?

It is no surprise to discover that cashback mortgages are very popular with would-be homeowners in the UK. Affordability is always going to be the biggest concern when applying for a home loan. There is also the necessity of having a reasonable deposit to help you buy your home. The knowledge that some loans offer cashback is very tempting in this scenario, especially at a time when funds are likely to be challenged more than ever. Moving costs can start to add up and some people look at the high mortgage cashback amounts offered as a useful tool to assist them. Â

What is cashback on a mortgage? How mortgage cashbacks work is quite simple to explain, it means that when you take out a new mortgage deal with a lender who offers cashback – upon completion of the mortgage, the lender will give you cash, via a bank transfer or via your solicitor. The amount of cash will be the amount which was advertised/offered within the mortgage deal you have taken out. In recent times we have seen cashback figures range from £250 – £1000, but as mentioned in the article you need to make sure that you compare this against potentially cheaper mortgage deals which do not offer any form of cash incentive.  Some have questioned whether this type of incentive is a good idea. It has been mooted that some people might be tempted by the cash to take on a loan to buy a property when they are not in a good position to do so. These concerns are understandable. However, the Mortgage Market Review which came into effect a few years ago, has required lenders to perform a ‘stress test’ on the finances of all applicants. They must confirm they are able to meet the monthly payments, not just now, but in a hypothetical future where interest rates have increased. These rules would surely mean these concerns would not be a major issue.  Here we look at some of the best cashback mortgages currently offered in the UK. Lloyds Bank may be worth considering, as they have several deals which fall into this bracket. They were recently offering a time-limited deal with £500 cashback on a two-year fixed rate deal. The interest rate was very competitive, with a maximum of 75% loan-to-value (LTV) in place. They also provide £500 cashback for customers taking up their two-year fixed rate deal. This deal is provided for those who have an 80% LTV. If you would rather take on a five-year fixed rate, they are offering slighter higher rates with the same amount of cashback involved, but this time the LTV is set at 60%. It’s not just Lloyds who are looking to offer cashback to those who are accepted for such loans. Accord Mortgages is an intermediary which offers cashback incentives on two deals. The first deal is a 75% LTV fixed for five years. The second option is to go for the same 75% LTV deal at a lower rate but this is set for just two years. The amount of cashback offered on both these re-mortgage deals is £250. TSB have focused on cashback for 1st time mortgages Much has been made of how challenging it is to get onto the housing ladder to start with. Financially, this can be the biggest challenge anyone will ever face. Many would agree it has always been this way, but the gap between earnings and house prices has never been larger than it is today.  This is something TSB is aiming to assist with. It is easy to see why first-time buyers would be tempted by cashback deals. They have put together a selection of loans aimed at this portion of the market, all offering up to £750 in cashback (this is of course subject to change). The deals span for periods of just two years up to ten years, the latter offering greater stability and knowledge at a time when interest rates are still historically low. This is good news for those wanting to purchase their first property. TSB has also positioned itself in a promising spot, having announced the abolition of all fees connected with their mortgage applications. The mortgage distribution director for TSB, Roland McCormack, stated that the company had experienced a record summer of applications. No doubt this will continue with the cashback offer and zero product fees as well. It sounds like the perfect mix for first-time buyers to take advantage of.  Yes, they are, in the same way as they are for most house purchases. However, you may also find that the develop may offer a cash back or similar incentive over and above what the mortgage company may offer.  Cashback offers on mortgages change all the time and those we have listed here are just a sample of what’s available and may be different by the time you start comparing mortgage deals. We of course have instant access to the latest mortgage offers with cashback and will provide you with an updated picture of what is available when you are ready to make some comparisons.  The word “cashback” is an appealing one. However, while it is easy to understand why people are eager to consider such deals, there are other elements you should take into account before choosing a mortgage. Some people will find a cashback loan is the best option for them. However, this won’t apply in every situation. Always look at the interest rate attached to the product. Sometimes cashback deals will exhibit a higher interest rate than those which do not offer cashback. In some cases, it can be cheaper to take a deal with a lower interest rate that foregoes the cash payment. To work out which would be best in your situation, compare the products you have found and calculate what your monthly payments would be, or let your broker do this on your behalf which would be the quicker option for you. It may be that there is very little difference between them, perhaps only a few pounds, in which case you might think the cashback would be a welcome addition at a time when you are most likely to need it. However, you may find you are going to pay £50 a month more for your mortgage by taking a cashback deal that gives you £250 upfront. In that scenario, it would take just five months to wipe out the amount the lender had given you. Following that point, you would be paying £50 more per month than you would have done if you had taken the deal that didn’t provide cashback. When you consider those figures, the deal on the “cashback” offer suddenly looks far less tempting than it did before.  Its worthy of consideration but any cash back type of deal is built into the pricing structure somewhere. We would suggest letting your broker compare the true cost of a new mortgage, taking into account, the monthly cost, the fees, the cash back to ascertain which mortgage deal is truly the best for you based on your individual circumstances. If a new mortgage deal over a 2 year period is £30 a month more expensive due to the £500 cashback being offered you would need to work out what is more important to you; the £500 cash back here and now or a £30 monthly saving on the mortgage deal with no cashback.(The cash back deal if £30 per month more expensive would cost you £30 x 24 months = £720 in additional cost)

Worthwhile? It depends on your circumstances at the time.  This is very important to note. We saw in the above example that while some cash upfront is very appealing to most people, it may not take long at all to be wiped out. It would be very easy to react positively to the lure of some extra cash in your account at the same time you take out the loan to buy your home. However, while such cash can be useful, it is wise to remember that a two-year or five-year fixed rate loan would mean meeting 24 or 60 monthly payments. Those payments could be far higher long after the cashback has been used.  Banks offer cashback on completion mortgages as a form of incentive to distinguish themselves from other lenders regarding their mortgage products. This is done in the hope that you will choose that particular lender to place your mortgage business with. For some people cashback is a welcome addition as it helps with those additional costs of moving. Some cashback deals are designed for first-time buyers who would generally use the cash to help with moving costs such as fees, or even helping replenish their savings account after paying out for a deposit. Some lenders offer cashback to assist you with the cost of legal fees instead offering a free legal service.  Let’s Compare a cashback deal against a standard mortgage deal For the sake of simplicity, we will make a comparison on a £200,000 repayment mortgage over 30-years, with a £1000 cashback incentive and an interest rate of 2.5% against a similar mortgage deal with no cashback at a rate of 2.25%. All other costs and fees associated with the mortgage are identical and we will look at a 2-year fixed rate and a 5-year fixed rate to see if this makes any difference to the calculations.  As you can see its always worth doing a realistic mortgage cashback check and comparison to make sure it’s the right decision for your individual circumstances! Contact Us

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