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Cashback vs best mortgage rate: which results in the cheapest deal?

Lenders tempt first-time buyers with cashback of up to £1,500

As a cash-strapped first-time buyer, being offered a thousand pounds or more straight into your bank account might seem too appealing to turn down – but are mortgage incentives actually worthwhile?

It’s a good time to get a mortgage with a small deposit, with rates on 95% deals dropping and an increasing number of lenders offering incentives, including cash.

But does cashback on your mortgage really make a difference, or are you better focusing on long-term gains over short-term windfalls?

 


More mortgage deals available with cashback

Right now, 827 of the 2,924 fixed-rate mortgages available to first-time buyers come with some form of cashback – a little more than a quarter.

The amount of cash on offer varies significantly from deal to deal, starting at £250 and rising as high as £1,250 (or £1,500 in Northern Ireland).

The table below shows how the percentage of first-time buyer deals with cashback incentives has increased in the last 12 months, as lenders battle for the first-time buyer market.

Number of deals available to first-time buyers Number of deals with cashback Percentage of deals with cashback
February 2018 2,819 656 23%
February 2019 2,924 827 28%

Source: Moneyfacts. Fixed-rate mortgages only. 2019 data based from 14 February 2019; 2018 data from 6 February 2018.

Who offers the biggest cashback incentives?

The table below shows which lenders currently offer the biggest cashback incentives.

This is based on a lender offering at least one first-time buyer mortgage with cashback, and doesn’t necessarily mean you can expect this incentive on all of its products.

Maximum cashback Lender
£250 Santander, NatWest, RBS, Chelsea, Danske
£300 Marsden
£500 AA, Atom, First Trust, Furness, Leek, Lloyds, Nationwide, Newcastle, Platform, Sainsbury’s, Skipton, Tesco, TSB
£1,000 Accord, Bank of Ireland, Barclays, Cumberland, M&S Bank, Monmouthshire, Newcastle, Post Office, Virgin, West Brom
£1,250 Yorkshire Building Society
£1,500 Bank of Ireland
1% of mortgage advance Skipton

Source: Moneyfacts. Fixed-rate mortgages only. 14 February 2019.  

How do lenders pay cashback?

You might notice when comparing deals that some lenders charge fees, but also offer cashback. So, for example, you might be charged £1,000 but offered £500 as an incentive.

This doesn’t mean the cashback will be subtracted from the fee. Instead, the incentive will be paid separately after the mortgage has begun.

How soon you’ll get the cash varies from lender to lender, so check their terms and conditions; some will commit to paying it within 14 days of the mortgage commencing.

How much difference does cashback make?

To see if an incentive really makes a difference, let’s take a look at the projected costs of the cheapest cashback and non-cashback two-year fixed-rate deals at 90% and 95% loan-to-value (LTV).

We’ve based our calculations on buying a £220,000 property with a 30-year mortgage term, and have compared the cost of the deal over an initial period of 24 months, as we assume a savvy borrower would look to remortgage at the end of their fixed-term.

The links you’ll find in the tables below take you to the relevant deal page on Which? Money Compare, where you can learn more about each product.

90% LTV (10% deposit)

Of the top 10 products at 90% LTV (by initial rate), two cashback deals – from Platform and Nationwide – make the top 10. Both, however, have a higher rate than the lowest priced deal without cashback, which is from HSBC.

Cashback Lender Initial rate Revert rate APRC Fees
None HSBC 1.79% 4.19% 3.9% £999
£250 Platform 1.84% 4.99% 4.6% £999


Cost over two years:

Deal Monthly payment for first two years Total paid over two years (repayments, flat fee, valuation fee)
HSBC (no cashback) £711 £17,064
Platform (£250 cashback) £716 £17,184


Conclusion:

Over two years, the Platform deal works out £120 (£5 a month) more expensive than the HSBC product, though once we factor in the £250 cashback, it’s actually £130 cheaper overall.

95% (5%) deposit

At 95% LTV, only one product with cashback makes the top 10 deals by initial rate – a mortgage from Tesco Bank with £500 cashback.

Cashback Lender Initial rate Revert rate APRC Fees
None Halifax 2.68% 4.24% 4.1% £995
£500 Tesco Bank 2.82% 4.04% 4% £995


Cost over two years:

Deal Cost per month during initial period  Total paid over two years (repayments, flat fee, valuation fee)
Halifax (no cashback) £846 £21,299
Tesco (£500 cashback) £861 £21,659


Conclusion:

The Tesco cashback deal works out £360 (£15 a month) more expensive over the two-year period, but once we factor in the £500 cashback, it’s actually £140 cheaper overall.

Source: All mortgage deals from Moneyfacts and all cost calculations conducted using the Moneyfacts mortgage calculator. 14 February 2019. 

So are cashback mortgages worthwhile?

In the two examples above, the amount of cashback on offer makes or breaks whether the deal wins out, but not to the extent that you should base your mortgage choice on this alone.

After all, the overall savings once cashback has been factored in (£130 and £140 respectively) work out at less than £6 a month across two years.

Indeed, when comparing first-time buyer mortgages, you may find that the relationship between initial rate and upfront fee is of greater importance.

While the examples above have middling fees of under £1,000, some of the deals come with fees of up to £2,000, which can wipe out the benefit of a low initial rate, and indeed any cashback incentive.

With that in mind, always look at the whole picture when comparing mortgages. And consider incentives such as cashback as a ‘nice to have’, rather than deal-breakers.

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