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Use our UK Finance guide and learn by experience. We outline pitfalls so that you don't have to learn the hard way, as many of us often do.

Mortgage

Cash back mortgages

Cashback mortgages provide you with a single lump sum of cash immediately on completion of the mortgage transaction.

The amount of the lump sum is usually calculated as a percentage of the overall loan amount, though it can be a set figure. The percentage of the loan that is given as cashback can be as high as 5%, though amounts in the region of 1 to 3% are more common. Various different types of rate can come with cashback - capped, discounted, fixed and variable.

Cashback mortgages rates

Fixed, variable, discounted and capped rates can all come with cashback and they are also available for people who are remortgaging. You may find that the higher the cashback, the less competitive the interest rates. This is because the lender will look to recoup the cash back money over the life of the loan by charging you more for borrowing it.You will probably have to choose between a cash bonus and a favourable fixed or discounted rate.

Terms and Conditions

Naturally, there are strings attached. If you want to move to another lender or mortgage or payoff a lump sum within the initial or tie-in period, you are likely to incur heavy ERCs. These will be some, or even all, of the original cashback sum. Some lenders have a sliding scale of ERCs that decrease each year or in steps. For example, with 10% cash back, if you payoff the mortgage in the first year you may have to pay 10% of the amount borrowed, 9% in the second year and so on.

It's understandable that large cashback deals will see you subject to heavy ERCs as this is the only way the lender can get its money back if you try to repay the mortgage early. However, if you'd be tied in for longer than six years at a variable rate, for example, you'd probably find that a mortgage at a lower rate - but without cashback - works out as a better deal long term. Equally, the size of the cashback sum is often linked to the percentage of the property value you are looking to borrow. Some of the largest cashback percentages are available only on mortgages up La 75% loan-to-value.

Other Cash back mortgages

There are other mortgages that offer a relatively small cashback deal - from £:?OO to £400. They are designed to appeal to people who need a cash sum to spend on legal fees or survey costs - although sometimes this will be specified, Often, though, these mortgages are not described as cashback mortgages at all, coming under a 'fixed¬rate with cashback' heading, for example. The advantage is that they will not usually have such severe early repayment charges (ERCs).

Alternatives

  • If you really do need some extra cash at the start of your mortgage but don't feel a cash back mortgage provides the best deal for you, there are several options you could consider:
  • A discount mortgage with a very good initial rare will mean low payments at the beginning before it reverts to a standard rate
  • A larger mortgage - at 85% rather than 80'1c, for example - will mean you need less money for the deposit and have extra money at the start of the term
  • An unsecured personal loan will be at a higher rate than your mortgage but it won't carry the same early repayment charges

What you need to know

  • You get a lump sum of cash when you take out the mortgage or after the first repayment • Most deals offer 3% to 5% of the loan as cash back
  • The higher the amount of cash back the higher the interest rate is likely to be
  • There may be severe early repayment charges if you switch lender or product
  • More competitive conventional deals offering smaller amounts of cash back are also available

 

Browse our UK mortgage guide

For most of us, buying a property will be one of the biggest decisions and purchases in our lives. Choosing the right mortgage deserves serious attention and planning.

With the collaboration of financial advisors we have put together a comprehensive guide to mortgaging in the UK. This guide will help you to find the right mortgage for you and put you on the right path to understanding what type of mortgage you will need.

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