The number of cashback mortgages on the market continues to be rising over the past couple of months, with both Halifax and Yorkshire Building Society now tempting first-time buyers with payouts of up to lb1,000 each.
These lenders are just the most recent to join the trend of offering cash incentives, as banks compete to attract first-time buyers.
A cash windfall might appear to be exactly what you need to finance moving and decorating, and can you wind up paying more over the long term? Which? weighs up whether these offers repay within the lifetime of a mortgage.
How do cashback mortgage deals work?
Cashback deals can be found on mortgages of all types: fixed-rate, standard variable, variable-rate, tracker and discount.
The cashback is paid for you from your mortgage provider once the property purchase completes. You're free to do anything you want using the cash, and it's not taxable.
The highest cashback offers currently on the market originate from Danske Bank, that provides lb1,500 on loans of over lb150,000. But mortgages are just on properties in Northern Ireland.
In accessory for Halifax and Yorkshire BS, M&S Bank, First Trust and Leeds Building Society also provide cashback offers of lb1,000.
These deals are usually particularly popular with first-time buyers who in many cases are strapped for cash along the way of buying their first property, especially if they've not considered extra costs such as attorney's fees and removal vans.
How do cashback mortgages compare?
A cash lump sum payment may seem enticing, however, if the rates or fees are higher, you could end up paying more during the period of the deal.
Say you’re a first-time buyer searching for a two-year fixed interest rate on a lb125,000 mortgage, in a loan-to-value of 90% (meaning you have enough cash to cover a 10% deposit).
There are lots of options available with Halifax which will give lb1,000 cashback under these circumstances, plus they have the ability to a 4% APRC (meaning the rate that payments average out in excess of the 25-year term of the mortgage).
Take the Halifax Fixed 3.47% deal as an example: you'd pay 3.47% until the stated date on 31 August 2022. If you do not switch to an alternative provider, the speed will revert to 3.99% (rounded up to 4%).
There's additionally a booking fee of lb295 along with a telegraphic transfer fee of lb160.
By comparison, the table below shows mortgage choices for the same scenario that don’t offer cashback.
The initial rates on offer are : cheaper than the deal from Halifax, although the APRC minute rates are higher. Over the two-year fixed part of the mortgage, you'd pay back far less – and you can change to a brand new deal afterwards to locate a better rate.
We've also sought out the cheapest offers which include cashback incentives.
No cashback mortgage offers an initial rate as low as a non-cashback mortgage. It’s also worth keeping in mind that most from the cashback offers with lower initial rates also have reduced cashback rewards.
These are outlined in the table below.
Should you get a cashback mortgage?
It’s less simple as simply looking at a mortgage’s initial rates.
Compare the cheapest non-cashback mortgage – Monmouthshire Building Society 4% discount for 2 years – with the cheapest cashback option, the TSB fixed 1.84% until 30/06/2022.
Monmouthshire's product includes a lb1,999 arrangement fee, a lb150 booking fee, lb25 transfer fee and lb20 insurance fee.
This is in contrast to TSB's mortgage, which requires a lb995 arrangement fee – which may be put into the borrowed funds – along with a telegraphic transfer fee of lb30.
Over the path of the two years – taking the fees, initial rate and cashback reward into consideration – you'd pay Monmouthshire lb13,486.48 and TSB lb12,738.22.
This splits up into 23 monthly repayments of lb520.14 to TSB, which may then increase to lb648.74 a month after the initial rate ends.
By contrast, you’d make 24 repayments of lb470.52 to Monmouthshire BS – which increases to lb708.01 after 2 yrs.
There are two main things to consider here.
First, you can end up paying more every month within the initial deal period if you go for incentives like cashback. Your monthly obligations on a low-rate deal are likely to be less expensive than those available on cashback offers.
Second, products advertising reduced rates can come with high fees. In the above example, despite lower initial repayments to Monmouthshire BS within the first two years, the general amount you'll pay is pumped up by the fees.
David Blake from Which? Mortgage Advisers says: 'Buying a house these days can be quite expensive as well as for some, cashback mortgages can really help with a lot more costs.
‘That said, you need to comprehend the full price of a mortgage taking into account all fees. Despite a cashback incentive, some products could be more expensive than the others.
‘It's wise to speak to a completely independent mortgage adviser to understand the true cost of a home loan and which product will be best for you.’
Other options for first-time buyers
A cash windfall is often appealing because of the very high cost buying a home. To enhance your savings, there are currently two government-backed schemes targeted at helping first-time buyers.
The Help-to-buy scheme includes an Isa as well as an equity loan designed to help people jump on the property ladder.
With the assistance to Buy Isa, the federal government adds a 25% bonus to whatever you save into the Isa (up to and including maximum bonus of lb3,000) when you come to buy a property.
The equity loan means you can borrow 20% (or 40% if you're in London) from the property's value in the government, reducing the amount you need to be included in a home loan. This equity loan is only applicable to new builds, and price restrictions apply.
There's even the lifetime Isa, in which the government will even give a 25% bonus to your savings. The difference here's that the bonus pays monthly in to the Isa account, and you may wake up to lb1,000 in bonuses a year.
The money could be paid towards a first property costing as much as lb450,000.