Cashback Mortgages

‘Cashback’ is certainly a word that jumps out of a page at you and may sound appealing at first glance, however, it is important to understand what this really means when you are taking out a mortgage.

In essence, it is an offer to pay you back money (often via your solicitor) upon the start of a mortgage, following completion; given to you by cheque – or more commonly now via BACS.

Some mortgage lenders may offer a relatively small ‘cashback’ sum of a few hundred pounds to help with legal or other fees incurred in the process – particularly if you are refinancing. This is not usually at the detriment of a higher rate and is generally just an incentive to try and glean your business.

However, for many years now there have been ‘cashback mortgages’ and these are a different animal altogether. Rather than offering you the security of a fixed rate mortgage or the flexibility of a variable rate, tracker or similar, the mortgage lender can also offer you one of these.

It sounds very tempting indeed to receive several thousand pounds (it’s usually a percentage of the amount you are borrowing) from the mortgage company when you move in – perhaps to help make the place your home or repay some, or all, of the moving costs. However, caution is advisable; you’ve no doubt heard the term: ‘no such thing as a free lunch’.

The lender will have carefully calculated the amount of money/interest you would pay them over the initial deal period on all their products; and subsequently the rate on these cashback products will be significantly higher so that they can recoup the money they have given you within the initial period.

This means it is really a loan where you may pay hundreds more a month than their best deal and you must stick with it for an initial redemption period – typically five years – or face having to pay the balance of the cashback back to the bank or building society.

So, while this may work for some, it’s important to understand its full implications before committing to such an arrangement.