Understanding Cashback Mortgages

Getting a mortgage is undoubtedly the biggest financial commitment we are ever likely to make, and in an era when house prices are booming and mortgage rates can seem unstable, never before has there been such a great need for constructive advice.

There are many different things to consider when taking out a mortgage, and as most people with experience will be able to explain, there are always ‘hidden costs’ that can escalate beyond the buyer’s anticipation. Some of the more general costs alone can mean balancing phenomenally large sums of money so it is important to research and consider before making any final decisions. Although a borrower may have a general knowledge about the minimum and maximum amounts of money that their mortgage provider will lend, and have an understanding about legal costs, valuations and surveys, estate agents fees, removal costs, mortgage arrangement fees and stamp duty; these tend to complete the approximate estimation of how much it will cost to buy a property, though there of course several other factors to consider.

For first-time buyers especially, anticipating the costs of buying a house can be very off-putting, but there are some signs of relief in the form of Cash back mortgages. This is where the mortgage provider pays the borrower a lump sum of cash on completion of the new mortgage. The amount of ‘cash back’ could be a fixed, specified amount, or it could be a percentage of the amount borrowed. Sometimes the mortgage lender will offer a sum of money specifically intended for legal costs or survey charges though in these cases the amounts tend to be a little lower but with higher interest rates.

Cashback on mortgages

Getting cashback on a mortgage can be useful to those who have underestimated the hidden costs of buying a house and in the weeks and months after finalising the move, may find themselves in need of quick cash injection for furniture or decorating the house though there are no conditions on what the cashback must be spent on; and when considering the real cost of moving house, there are a number of things that a quick cash injection might contribute to.

Mortgage high lending charges are fees used to buy insurance to protect the mortgage provider if you borrow more than a certain amount. Many lenders will have a cut off point, lending you as much as, say, 90% of the value of the property without this fee; but if the borrower wants more, then they are usually required to pay insurance to ensure that the lender will get a full return if the property is sold for less than the amount of the mortgage. Given the general uncertainty of house prices at the moment, it is understandable that these charges are becoming more common.

Mortgage related insurance is another cost that borrowers can sometimes overlook. Lenders naturally insist upon a buildings insurance policy which would cover the usual risks, but as an addition, contents insurance would be required in case of theft, fire and damage. There are other types of insurance to protect against unemployment, redundancy and sickness.

There are two ways in which a cash back mortgage may be offered by a mortgage provider. The first is a cash back mortgage with a lenders standard variable rate (usually abbreviated to SVR). They can offer large sums back on completion of the mortgage, often as high as 6% though figures have gone even higher in more recent times as the general cost of house prices have raised. Though there are no conditions on what the cashback benefit should be spent on, it is perhaps worth mentioning that the cashback is often paid two to three weeks after the mortgage has been completed, making it difficult to use as a deposit on a house purchase.

The other cashback mortgage available is usually offered alongside another mortgage product such as a discount rate scheme or a fixed rate program. The sums of cashback are usually smaller, enough to cover a mortgage valuation perhaps or contributions towards legal costs.

The main advantage of a cashback mortgages is that the available cash can be useful when all other finances are tied up in the process of borrowing, but without careful consideration, the drawbacks can outweigh this if an early repayment charge may apply for a set period which could effectively mean the borrower is paying back all of the cash they received.

Mortgage cashback rates

The rates of cashback will inevitably vary depending on the lender, though a typical example might be 5 % cashback on the initial mortgage so a loan for house purchase (rather than re-mortgage) of £90,000, would produce an available cashback sum of £4,500. But for those money-savvy people who have the time to shop around, there are ways to further the levels of cashback returned on a mortgage.

As the internet becomes more accessible domestically, shopping habits of the consumer have changed. With the freedom to research and shop at leisure and with a variety of choice that surpasses expectation, the consumer is quickly becoming overwhelmed as they search for the product they require. The rise of price comparative sites has narrowed the choice for the consumer, directing them to the best value-for-money offers but it is the rise of the ‘cashback website’ that offers the most optimistic change in internet shopping.

Cashback sites and mortgages

Cashback sites will list those providers of a particular product, taking money from the retailers for advertising their business and providing a direct link to their own websites. The retailers pay commission to the cashback sites every time a customer makes a purchase as a result of that introduction. Rather importantly however, the cashback website then returns a proportion of that commission fee back to the customer either in the form of loyalty pints or cash which they can claim back after a particular period of time. (Ideally the customer will acquire more cash from shopping on a variety of sites, so the cashback websites will request that the customer reaches a particular amount before they claim back in full).

Though offers on cashback mortgages vary from site to site, a typical offer for just completing an online application form could be as standard cashback reward of up to £75.

Cashback mortgages should be considered carefully. In short, they can offer some great incentives for those who have confidence in the specific mortgages they are after but remember that whilst these offers have an obvious short-term advantage to borrowers, the type of mortgage they are attached to often has a ‘tie in’ period that lasts a number of years in which the cashback must be repaid in part or in full should the borrower decide to pay off their mortgage or switch to another lender.

Filed under: Cashback Guides