The number of cashback mortgages on the market has been rising over the past few months, with both Halifax and Yorkshire Building Society now tempting first-time buyers with payouts of up to £1,000 each.
These lenders are just the latest to join the trend of offering cash incentives, as banks compete to attract first-time buyers.
A cash windfall may seem like exactly what you need to finance moving and decorating, but will you end up paying more over the long term? Which? weighs up whether these offers pay off over the life of a mortgage.
How do cashback mortgage deals work?
Cashback deals are offered on mortgages of all types: fixed-rate, standard variable, variable-rate, tracker and discount.
The cashback is paid to you from your mortgage provider once the property purchase completes. You’re free to do whatever you want with the cash, and it’s not taxable.
The highest cashback offers currently on the market come from Danske Bank, which offers £1,500 on loans of over £150,000. But mortgages are only available on properties in Northern Ireland.
In addition to Halifax and Yorkshire BS, M&S Bank, First Trust and Leeds Building Society also have cashback offers of £1,000.
These deals tend to be particularly popular with first-time buyers who are often strapped for cash during the process of buying their first property, especially if they’ve not factored in extra costs such as legal fees and removal vans.
- Find out more: Mortgage types explained
How do cashback mortgages compare?
A cash lump sum may seem enticing, but if the rates or fees are higher, you could end up paying more over the course of the deal.
Say you’re a first-time buyer looking for a two-year fixed rate on a £125,000 mortgage, at a loan-to-value of 90% (meaning you have enough cash to cover a 10% deposit).
There are many options available with Halifax that will give £1,000 cashback under these circumstances, and they all have a 4% APRC (meaning the rate that payments average out at over 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 2020. If you don’t switch to an alternative provider, the rate will then revert to 3.99% (rounded up to 4%).
There’s also a booking fee of £295 and a telegraphic transfer fee of £160.
By comparison, the table below shows mortgage options for the same scenario that don’t offer cashback.
The initial rates available are far lower than the deal from Halifax, though the APRC rates are higher. Over the two-year fixed part of the mortgage, you’d pay back far less – and you could switch to a new deal afterwards to find a better rate.
We’ve also looked for the cheapest offers that 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 of the cashback offers with lower initial rates also have much lower cashback rewards.
These are outlined in the table below.
Should you get a cashback mortgage?
It’s not as simple as just 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 30/06/2020.
Monmouthshire’s product includes a £1,999 arrangement fee, a £150 booking fee, £25 transfer fee and £20 insurance fee.
This is compared with TSB’s mortgage, which requires a £995 arrangement fee – which can be added to the loan – and a telegraphic transfer fee of £30.
Over the course of the two years – taking the fees, initial rate and cashback reward into account – you’d pay Monmouthshire £13,486.48 and TSB £12,738.22.
This splits up into 23 monthly repayments of £520.14 to TSB, which would then increase to £648.74 a month after the initial rate ends.
By contrast, you’d make 24 monthly repayments of £470.52 to Monmouthshire BS – which increases to £708.01 after two years.
There are two main things to consider here.
First, you could end up paying more each month in the initial deal period if you go for incentives like cashback. Your monthly payments on a low-rate deal are likely to be cheaper than those available on cashback offers.
Second, products advertising low rates can come with high fees. In the above example, despite lower initial monthly repayments to Monmouthshire BS in the first two years, the overall amount you’ll pay is pumped up by the fees.
David Blake from Which? Mortgage Advisers says: ‘Buying a property these days can be very expensive and for some, cashback mortgages can really help with additional costs.
‘That said, it’s important to understand the full cost of a mortgage taking into account all fees. Even with a cashback incentive, some products will be more expensive than others.
‘It’s a good idea to speak to an independent mortgage adviser to understand the true cost of a mortgage and which product will be right for you.’
- Find out more: Are you ready to be a first-time buyer?
Other options for first-time buyers
A cash windfall is often appealing due to the high cost of buying a home. To boost your savings, there are currently two government-backed schemes aimed at helping first-time buyers.
With the Help to Buy Isa, the government adds a 25% bonus to whatever you save into the Isa (up to a maximum bonus of £3,000) when you come to buy a property.
The equity loan means you can borrow 20% (or 40% if you’re in London) of the property’s value from the government, reducing the amount you need to be covered by a mortgage. This equity loan is only applicable to new builds, and price restrictions apply.
There’s also the lifetime Isa, where the government will also add a 25% bonus to your savings. The difference here is that the bonus is paid monthly into the Isa account, and you can get up to £1,000 in bonuses a year.
The money can be paid towards a first property costing up to £450,000.