Non Standard Mortgages - First Time Buyer
Cashback Mortgages
Cashback mortgages provide you with a single lump sum of
cash either immediately on completion of the mortgage transaction
or after the first monthly repayment.
The amount of the lump sum is usually calculated as a percentage
of the overall loan amount, though it can be a set figure.
Some lenders offer a sliding scale of cashback, depending
on how long borrowers are willing to tie themselves in to
the deal. Although cashback amounts in the region of 1 to
3% are fairly common, the percentage of the loan that is
given as cashback can be as high as 10%. Such seemingly
great deals don't usually come without strings attached
however, usually in the form of very severe early redemption
penalties that may well involve the repayment of some, all
or even more than the cashback value.
It is quite common to find mortgages that include a relatively
small cashback element, possibly in the region of £200 to
£250. This can be a cash sum for you to spend as you wish,
though it sometimes has a specified purpose, such as covering
all or part of your solicitor fees. This type of cashback
deal does not usually have such severe penalties and may
well not be advertised as a cashback mortgage.
Various different types of rate can come with cashback
- capped, discounted, fixed and variable, with cashback
products usually available for both mortgages and remortgages.
It is not common to associate cashback schemes with UK-based
foreign currency mortgages, tracker mortgages or other non-standard
loans.
Advantages
Cashback schemes can be useful for buyers who need to have
funds available more or less immediately after the mortgage
is completed. Although most cashback deals are open to all
borrowers, one group with whom they are particular popular
is first time buyers. The cashback sum is often used to
buy furniture, fittings and other mod cons that they may
not already have, or used to cover the cost of stamp duty,
surveys, legal fees or other such incidentals.
Disadvantages
The rate of interest is likely to be higher than for non-cashback
equivalents, since the lender will seek to recoup the cashback
sum over the life of the loan by charging you more for the
privilege of borrowing the money. By opting for a cash bonus,
you will normally be giving up the option of a competitive
fixed rate or a hefty initial discount.
It is often the case that the higher the cashback the less
competitive the rate of interest, either during any discount
period or once the mortgage reverts to the lender's SVR.
The more the lender gives you up front, the more they will
need to charge you to make the money back in the long term.
When you take into account the build up of interest over
time that the higher rate will accrue, this form of mortgage
often proves to be relatively inefficient.
Cashback mortgages almost always carry early redemption
penalties. If you try to pay off the mortgage within the
penalty period, whether by selling your home or remortgaging,
you may have to pay a fairly substantial sum of money back
to the lender. Some lenders operate a sliding scale of penalties,
which decrease each year, or in steps, while others will
charge the same penalty for the entire early redemption
period.
The size of the cashback sum is often linked to the percentage
of the property value that a customer is seeking to borrow.
Some of the largest cashback deals are available only to
those borrowers with a 75 percent deposit. Where this is
the case, it can be cheaper in the long run to go for a
more competitive non-cashback loan worth a larger percentage
of the property value and hang on to some of the cash that
was otherwise earmarked for the deposit. Where a lender
operates such an incremental cashback scheme, the same reasoning
applies at higher loan-to-value amounts.
