Mortgage types

Cashback mortgages

Cashback mortgages provide a lump sum that you can use during the buying process

Usually a percentage of the amount borrowed, cashback is designed to be an incentive for borrowers who decide they need a bit more cash available when they buy a home. You receive the money either when you take out the loan or after the first monthly repayment.
Most cashback deals offer around 3% to 5% cashback but it’s possible to find deals with as much as 10%. It can also be a set figure. However, the higher the percentage, the longer you are likely to be tied in for and some mortgages carry heavy early repayment charges (ERCs) that may even require you to pay back some of the cashback to the lender.

Fixed, variable, discounted and capped rates can all come with cashback and they are also available for people who are remortgaging.
You may find that the higher the cashback, the less competitive the interest rates. This is because the lender will look to recoup the cashback money over the life of the loan by charging you more for borrowing it.
You will probably have to choose between a cash bonus and a favourable fixed or discounted rate.

Terms and conditions
Naturally, there are strings attached. If you want to move to another lender or mortgage or pay off a lump sum within the initial or tie-in period, you are likely to incur heavy ERCs. These will be some, or even all, of the original cashback sum.
Some lenders have a sliding scale of ERCs that decrease each year or in steps. For example, with 10% cashback, if you pay off the mortgage in the first year you may have to pay 10% of the amount borrowed, 9% in the second year and so on.
It’s understandable that large cashback deals will see you subject to heavy ERCs as this is the only way the lender can get its money back if you try to repay the mortgage early. However, if you’d be tied in for longer than six years at a variable rate, for example, you’d probably find that a mortgage at a lower rate – but without cashback – works out as a better deal long term. Equally, the size of the cashback sum is often linked to the percentage of the property value you are looking to borrow. Some of the largest cashback percentages are available only on mortgages up to 75% loan-to-value.

One-off sums
There are other mortgages that offer a relatively small cashback deal – from £200 to £400. They are designed to appeal to people who need a cash sum to spend on legal fees or surveyors’ costs – although sometimes this will be specified. Often, though, these mortgages are not described as cashback mortgages at all, coming under a ‘fixed rate with cashback’ heading, for example. An advantage is that they will not usually have such severe ERCs.

If you really do need some extra cash at the start of your mortgage but don’t feel a cashback mortgage provides the best deal for you, there are several options you could consider: 
A discount mortgage with a very good initial rate will mean low payments at the beginning before it reverts to  a standard rate 
A larger mortgage – at 85% rather than 80%, for example – will mean you need less money for the deposit   and have extra money at the start of the term 
An unsecured personal loan will be at a higher rate than your mortgage but it won’t carry the same ERCs

Need to know

  • You get a lump sum of cash when you take out the mortgage or after the first repayment 
  • Most deals offer 3% to 5% of the loan as cashback
  • The higher the amount of cashback the higher the interest rate is likely to be
  • There may be severe early repayment charges if you switch lender or product
  • More competitive conventional deals offering smaller amounts of cashback are also available 

Information source:  Mortgage Advisor & Home Buyer publication