When you’re exploring mortgage options, it’s easy to feel overwhelmed by interest rates, monthly payments, and the overall cost of borrowing. One option that might stand out is a cashback mortgage. This type of mortgage gives you a lump sum of money once the loan is secured. However, it’s important to understand how cashback mortgages work and what benefits and drawbacks they come with.
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What is a cashback mortgage?
A cashback mortgage is a type of loan where the lender provides you with a cash payment once your mortgage is secured. The concept is straightforward: after finalising the deal, you receive funds that can be used for various purposes, such as covering moving costs, making home improvements, or managing other expenses related to your new property. This can be a valuable benefit, but it’s worth noting that the cashback amount is typically included in the overall cost of the mortgage, so it’s helpful to consider the full terms of the deal.
If you are exploring mortgage options, speak with our mortgage partners for personalised advice.
How does mortgage cashback work?
Essentially, a cashback mortgage gives you money back once the transaction is finalised. The cashback can be a set amount or a percentage of your loan. Typically, it’s paid out in a lump sum after the mortgage is completed, often within a few weeks.
However, while you’re receiving the funds, it’s important to note that your interest rate may be higher than what you would pay with other types of mortgages. This means that over the life of the loan, you could end up paying more in interest than with a standard mortgage. While the cashback is appealing, it’s important to weigh it up against the long-term costs.
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Types of mortgages offering cashback
Cashback mortgages are available across a few different types of loans. Here’s what to look out for:
Fixed rate mortgages
With a fixed-rate mortgage, your interest rate stays the same for a set period, such as 2, 3, or 5 years. Some lenders offer cashback as an incentive to take out a fixed-rate loan, which can give you a predictable monthly payment for the duration of the deal.
Variable rate mortgages
A variable-rate mortgage means your interest rate can change during the term of the mortgage. Lenders may offer cashback with these loans as well, but keep in mind that your monthly repayments can go up or down depending on market interest rates.
Tracker rate mortgages
Tracker mortgages are linked to the Bank of England’s base rate, meaning your interest rate follows the fluctuations of that base rate. Some lenders also offer cashback with tracker mortgages, but just like variable rates, this means your repayments could change over time.
Related: Understanding the different types of mortgages
What are the benefits of a cashback mortgage?
Cashback mortgages might seem like a good deal, and for many people, they are. Here’s how they can work in your favour:
Help with upfront costs
Buying a home is expensive, and the costs can add up quickly, from stamp duty to legal fees, surveys, and moving expenses. A cashback mortgage can help ease the pressure of these initial costs, providing you with the extra cash you need right when it matters most.
Extra financial flexibility
Having a lump sum of cash can give you more financial freedom. Whether it’s for making home improvements, covering unexpected costs, or simply giving you a cushion to fall back on, the cashback offers flexibility in how you manage your finances.
Offsetting initial expenses
For first-time buyers, the upfront expenses of buying a home can feel overwhelming. Cashback mortgages provide a bit of financial relief by giving you money that can be used to cover some of these costs, making the entire home-buying experience a little bit easier.
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What are the drawbacks of a cashback mortgage?
Cashback mortgages come with some great benefits, but there are a few things to think about before you commit. Here are some things to keep in mind:
Higher interest rates
One of the biggest drawbacks of cashback mortgages is that lenders often increase the interest rates to compensate for the cashback offer. This means that while you might get money back upfront, you could end up paying more over the life of the loan due to higher repayments.
Limited availability
Cashback mortgages aren’t available everywhere, and not all lenders offer them. Even when they are available, cashback offers are often limited to certain types of mortgages, such as fixed-rate or tracker mortgages. This means you might have fewer options if you’re specifically looking for a cashback deal.
Early repayment charges
Many cashback mortgages come with early repayment charges. If you want to pay off your mortgage early or switch to another deal, you could face penalties. This can make it difficult to move your mortgage elsewhere if you find a better deal down the line, and it could negate the benefit of the cashback.
Reduced borrowing potential
In some cases, lenders may reduce the amount they’re willing to lend you if you opt for a cashback mortgage. This is because the cashback is often considered a cost to the lender. If you’re planning to borrow a higher significant amount, this could be something to think about.
Related: Understanding mortgage holidays
Is a cashback mortgage right for you?
Cashback mortgages can be a good option if you’re looking for a bit of extra help with the upfront costs of buying a home. They offer an attractive lump sum of cash that can ease some of the financial pressures, particularly for first-time buyers. However, the higher interest rates and potential early repayment charges mean they may not be the best choice for everyone.
Before deciding on a cashback mortgage, it’s important to carefully compare the rates and terms to ensure you’re getting the best deal for your situation. Speaking to a mortgage adviser can help you explore your options and find the right fit for your needs.
Making the right choice
A cashback mortgage can be a great way to get a financial boost when buying a home, however weighing up the immediate benefit of cashback against higher interest rates and early repayment charges will help you decide if it’s the right choice for you.
Our team is here to guide you through the process and help you make an informed decision. If you’d like to explore your mortgage options or need advice on cashback mortgages, get in touch with your local Whitegates branch.
