What Is a Cashback Mortgage?
A cash-back mortgage is a type of mortgage which includes a special incentive in the form of a cash payout after the mortgage is approved. Low deposits are often accepted on cash-back mortgages.
Continue reading to get all the nitty-gritty details.
How Do Cash-Back Mortgages Work?
After you and the lender agree on the terms of your mortgage and your application is approved, the lender transfers the cash back to you as a lump sum (normally between £200-£1000). Every lender has its terms and conditions, so the point at which your cashback is released may vary.
On the majority of cashback mortgages, lenders pay the cashback incentive soon after the mortgage has been approved, although this can vary. With some mortgages, a small amount of cashback is released every month, and there are even some which payout upon completion of the mortgage- 20 years down the line!
Many people use the cash back to help pay for moving vans, solicitors fees, or other costs related to moving house. A small number of deals give cashback towards specific expenses such as energy bills, but in most cases, you can choose to spend the money, however, you like.
After your mortgage has been approved and your cashback released, the loan continues as usual. Every month, you make a payment to the lender which goes towards paying off the capital you borrowed and interest on that capital. At the end of the mortgage term, you have paid everything off and own your home outright.
How Much Deposit Do I Need?
Some cashback mortgage providers offer loans up to 100% of the value of the home you want to buy. However, 100% of mortgages can entail high-interest rates, and the majority of cashback mortgages require you to put at least 5-10% towards the purchase of the property.
This is still much lower than is required for many other mortgages, where you might need anywhere from 15-25% deposit to qualify.
How Much Cashback Can I Get?
The amount of cashback on offer varies from lender to lender although most offer somewhere between £200-£1000. Some providers advertise fixed cashback amounts, so the same is paid to everyone regardless of the size of their mortgage.
Other lenders calculate cashback as a percentage of the mortgage itself. For example, a 0.5% cashback offer on a £150, 000 mortgage would result in a £750 payout.
In a small number of cashback mortgages, the payout is calculated as a percentage of your monthly repayment. In this case, a 1% cashback deal on a £700 monthly instalment would see a £7 payout every month.
How Much Does It Cost?
To understand the costs of cashback mortgages, it is essential to look beyond the incentive. Getting a cash injection at the start of the mortgage is an appealing thought, but you could easily end up paying all of that money back in fees and interest.
Often the interest rates offered on cashback mortgages are not the most competitive. Some of the mortgages with the highest payout also have high-interest rates, in part due to the low deposit that lenders ask for with this type of mortgage.
It is important to compare the savings you could make by opting for a lower cashback amount with a better interest rate (or even a different kind of mortgage altogether) rather than picking your mortgage based on the cashback offered alone.
You can see in the table below how opting for a lower interest rate could save you more money that a generous cashback payout in just a matter of months:
Examples of Cashback Offers on a £190,000 Mortgage Over 25 Years
|Cash-back||Interest (%APR)||Monthly Repayment||Total to pay|
Interest Rates on Cashback Mortgages
Most cashback mortgages use the lender’s standard variable rate of interest (SVR) or follow a tracker model. Both of these are variable interest rates, which means your monthly repayments can go up and down every month.
Tracker mortgages follow the movements of another interest rate at a fixed percentage above it. The most common interest rate for tracker mortgages to follow is the Bank of England’s base rate.
For example, on a 2% tracker mortgage, your interest rate is always 2% higher than the Bank’s base rates. So, if the Bank of England set the base rate to 0.5%, you would pay 2.5% interest.
Tracker mortgages can be very cheap, especially when interest rates are low. However, the tracker normally only runs for a short period (normally 2-5 years) before reverting to the lender’s standard variable rate.
Every lender has a standard variable rate, which is an interest rate set by them and which they can change whenever they like. The SVR tends to be the most expensive interest rate offered by most lenders and runs for an unlimited amount of time.
Who Is It For?
Anyone can apply for a cashback mortgage, but the low deposit requirement may entice first-time buyers or people who have a limited income.
Lenders all have their criteria, so while one lender might steer to towards a different deal, you could be another’s idea of the perfect cashback customer.
Can I Apply if I Have Bad Credit?
There are many lenders who consider people with poor credit histories for cash-back mortgages. You may need a slightly higher deposit to get approved.
Still, considering the very low deposits required for most cash-back mortgages this may translate to as little as 10-20% deposit, which is still quite low compared to most mortgages.
How Much Can I Borrow?
Most lenders cap mortgage borrowing at 4.5 times your income before tax, but the exact amount you can borrow depends on a number of factors including your outgoings. In practise, the lender often agrees to mortgages which are 3-4.5 times a person’s pre-tax income.
Expenses such as other debts, childcare, food, energy bills and even holidays are taken into account by a lender, who uses this information to make an assessment of how much you can afford to pay each month.
Since the financial crash, lenders have become more cautious about signing off on mortgages which could be unaffordable if people have a change of circumstances.
Pros and Cons of Cashback Mortgages
|Access to a lump sum to help with the costs of moving||Many Cash-back deals involve higher than average interest rates|
|Available with a lower deposit than many other mortgages||Being able to apply with a low deposit can cause people to take on more than they can afford.|
How Can The Mortgage Bank Help?
Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.
They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.