What Is a Cashback Mortgage?
A cashback mortgage is a mortgage deal that pays you a lump sum of cash, either when the mortgage completes or shortly afterwards. The cashback amount can range from a few hundred pounds to several thousand, depending on the lender and the deal.
The cashback is typically calculated as a fixed amount or a percentage of the mortgage advance. For example, a lender might offer £500 cashback on completion, or 1% of the loan amount, which on a £200,000 mortgage would be £2,000.
Cashback offers can be found on fixed rate, tracker, and variable rate mortgages. They're designed to attract borrowers by offering an upfront financial incentive, but it's important to look at the overall cost of the deal, not just the cashback amount.
How to Assess Whether Cashback Is Worth It
The key question is whether the total cost of the cashback mortgage, including the interest rate and fees, is genuinely competitive compared to deals without cashback. Lenders may offer cashback on deals with slightly higher interest rates, meaning the cashback effectively comes out of your own pocket through higher monthly payments.
To make a fair comparison, calculate the total cost of each mortgage over the deal period, including the interest paid, arrangement fees, and any other costs. Then subtract the cashback from the total cost of the cashback deal. If it's still more expensive than a non-cashback deal, the cashback isn't providing genuine value.
Many comparison tools and mortgage brokers can help you run these calculations. Don't be swayed by the headline cashback amount without understanding the full picture.
When Cashback Mortgages Can Be Useful
Cashback can be genuinely valuable if the overall deal is competitive even without the cashback. In this case, the lump sum is a genuine bonus that can help with moving costs, home improvements, or simply building up your savings.
For remortgagers, cashback can help cover the costs of switching, such as legal fees, valuation fees, or any arrangement fee on the new deal. Some lenders offer cashback specifically designed to cover these switching costs, making the remortgage effectively free.
If you're choosing between two deals with very similar overall costs, a cashback offer can tip the balance. The key is that the cashback should be a deciding factor only when the deals are otherwise comparable, not a reason to choose a more expensive mortgage.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.