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15 May 2019

Are cashback mortgages for first-time buyers worthwhile?

Nottingham launches deals offering cashback of up to £1,000 to first-time buyers

Nottingham Building Society has become the latest lender to offer first-time buyers up to £1,000 in cash, but should you be tempted by the incentives offered by mortgage lenders?

Here, we crunch the numbers to see whether the cash lenders offer you is truly a 'bonus,' or whether you end up paying more in fees and rates.

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Nottingham launches cashback mortgages

Nottingham Building Society has launched a new range of cashback mortgages for first-time buyers.

The fixed-rate deals offer incentives of £1,000 for borrowers at 90% loan-to-value (LTV) and £500 for those borrowing at 95%.

But is Nottingham ahead of the game or have cash incentives on first-time buyer mortgages become commonplace?

How many first-time buyer mortgages come with cashback?

When we crunched the numbers back in February, we found that a more than a quarter of fixed-rate mortgages available to first-time buyers came with cashback. Three months on, that's still the case.

Right now, 757 of the 2,753 products open to first-time buyers have some form of cashback (27% of deals), according to data from Moneyfacts.

This figure increases dramatically, however, when we look at fixed-rate products available for first-time buyers with small deposits - more than four in ten 90% mortgages now come with cashback, and half of 95% deals do so.

Maximum LTVNumber of fixed-rate dealsNumber of deals with cashbackPercentage of deals with cashback

How much cashback are lenders offering?

Our research shows that lenders are currently offering cashback ranging from £200 to £1,500, meaning the £1,000 on offer from Nottingham is highly competitive.

For both 90% and 95% LTVs, we found that £500 is the most common amount of cashback.

How competitive are cashback mortgages?

A little extra cash in your pocket is always welcome, but the big question is whether lenders are making up for their generosity elsewhere - perhaps by charging you a higher interest rate.

Indeed, when we look at two and five-year fixed-rate deals at 90% and 95% LTV, we can see that none of the market-leading introductory rates are on products that come with cashback.

The tables below show how, generally speaking, the more cashback a lender gives you, the more they charge you in interest.

90% loan-to-value

Two-year fix

CashbackLenderLowest initial rateRevert rateAPRCFees
£500Virgin Money1.96%4.99%4.4%£995

Five-year fix

CashbackLenderLowest initial rateRevert rateAPRCFees

95% loan-to-value

Two-year fix

CashbackLenderLowest initial rateRevert rateAPRCFees
£250Leek United2.95%5.69%5.3%None

Five-year fix

CashbackLenderLowest initial rateRevert rateAPRCFees
NoneHanley Economic2.99%5.44%4.6%£999
£250Leek United3.29%5.69%4.8%None
£1,500West Bromwich3.44%4.49%4.2%None

How much will my payments be on a cashback mortgage?

A higher mortgage rate usually means a higher monthly payment, but in some cases the difference can be negligible. For example, you might be quite happy to pay £10 a month extra to get £500 cashback up front, whereas you'd be less eager to pay £50 a month more.

With this in mind, we've modelled how much each of the deals might cost you on a monthly basis during your two or five-year introductory period.

Our figures are based on taking out a mortgage on a £200,000 property (so a loan of £180,000 at 90% LTV, or £190,000 at 95% LTV).

Is cashback worthwhile?

As you can see in the charts above, your monthly payments would slightly increase depending on the amount of cashback you receive up front.

At 90% LTV, the cheapest two-year rate without cashback comes in just £36 a month cheaper than the best rate with £1,000 cashback. That means that over the two years, you'd theoretically be £136 better off by taking the cashback deal.

But when we look at two-year deals at 95%, the gap stands at £52 a month - meaning that over that period the cashback deal would be £248 more expensive.

As you might have gathered, whether you should take a cashback product depends on two things: the specifics of the deal itself and how much you need the upfront cash.

When do lenders pay cashback?

When comparing mortgage deals, you might notice that some lenders offer cashback but also charge an upfront fee. For example, the cashback might be £500, but the fee might be £1,000.

This doesn't mean the cashback will be subtracted from the fee. Instead, the cash incentive will be paid into your account 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 pay within 14 days of the mortgage commencing.

Advice on your mortgage options

There are thousands of mortgages out there for first-time buyers, so it can be helpful to take professional advice from a whole-of-market mortgage broker, who can assess all of the available deals to find the right one for you.

A good broker should also inform you if the best deal is only available directly from a lender. You can find out more in our guide on choosing a mortgage broker.