Cashback mortgage deals – are they really worth it?

Mortgage lenders frequently offer incentives to borrowers as part of a mortgage deal, sometimes in the form of cashback. A cashback mortgage could give you an extra reason to choose that particular mortgage deal, especially if paying solicitor's fees and funding your deposit will deplete your cash savings. However, with any such deal, it is always important to weigh the extra costs against the overall benefits before plumping for what might seem very attractive but could prove expensive in the long run.

In this article, we explain what cashback mortgages are, how they work and how to understand the real value they provide.

What is a cashback mortgage?

A cashback mortgage is a deal that offers the borrower the incentive of a sum of cash that is usually paid to them once the property purchase is completed. Cashback offers can vary, with sums of between £50 and £10,000 offered to borrowers. They are often targeted at first-time buyers who may find themselves low on cash after using their savings to put a deposit down on their first home.

How do cashback mortgages work?

Your cashback mortgage will usually have all the same variable options that other mortgages offer. You will be able to choose whether your mortgage interest is fixed or variable, although cashback offers tend to be more prevalent with fixed-rate mortgages. You will also be able to choose whether you wish to repay your mortgage on an interest-only or a repayment (capital and interest) basis. This likely won't have a bearing on the cashback offer, but you usually find more cashback offers with repayment mortgage options. Other mortgage variables, such as the mortgage term and mortgage loan amount, may be limited in order to qualify for the cashback offer.

How could a mortgage with cashback help you?

Generally, cashback mortgages will pay the cash sum to the borrower directly after the mortgage is completed and there may be a time delay before funds are received. This means that the money may not be useful in covering costs that arise as part of the mortgage arrangement but could help with the cost of furnishings, white goods and other initial expenditures when you move into your home.

Which lenders offer a cashback mortgage?

Like most other mortgage incentives, cashback mortgage deals change regularly. You will find that most cashback offers are time-limited, giving you a window of opportunity to secure the deal before it disappears. Lenders may target specific types of borrowers when offering cashback, so do make sure that you meet the qualifying criteria. First-time buyers, those buying an eco-friendly or new-build property, and shared-ownership purchasers are commonly selected for these offers.

To find the best cashback mortgage deals and compare these, it is best to speak with a mortgage broker* who can search the market on your behalf and may have access to broker-only deals that you cannot access directly with a mortgage lender.

Currently, there are a number of lenders, including Skipton Building Society, Yorkshire Building Society, Accord Mortgages and TSB Bank, that are offering cashback mortgage deals.

Cashback mortgages compared

Here we have compared cashback mortgage deals that are currently available to first-time buyers. We have detailed the overall cost over 5 years of the cheapest 5-year fixed rate mortgage deal that offers no cashback and compared this with the overall cost over 5 years of various cashback deals. It is important that you balance the advantage of receiving a cash sum of money with the overall cost of the cashback mortgage to work out the true value of the deal.

Cashback mortgage deals compared

	Cheapest 5 year fixed rate deal - no cashback	Average 5 year fixed rate deal - no cashback	Skipton Building Society Track Record Mortgage with cashback	Virgin Money
Fixed term	5 years	5 years	5 years	5 years
Lender fee	£0	£1,100	£0	£25
Interest rate	4.48%	4.71%	5.37%	4.74%
Monthly payment	£2,401	£2,466	£2,658	£2,474
Overall cost of the mortgage over 5 years	£144,060	£147,960	£159,480	£148,440
Cashback incentive	£0	£0	£1,000	£300
Net overall cost of the mortgage over 5 years	£144,060	£149,060	£157,480	£148,165

The above costs are provided based on the following: 95% loan-to-value, property value of £500,000, deposit of £25,000, loan amount of £475,000, mortgage term of 30 years

It is clear from the comparison that borrowers who would otherwise be able to secure the lowest mortgage interest rate, or even an average interest rate deal, could be better off overall with no cashback as the additional cost may not outweigh the upfront benefit.

It may be the case that, in certain circumstances, the convenience of cashback with your mortgage outweighs the extra cost, and this will depend on your specific financial situation. However, it is vital that you calculate exactly how much more a mortgage deal with cashback may cost you before making your decision. If you are unsure, you should speak with a mortgage expert to get independent advice that may lead you to a better solution for your needs.

Are cashback mortgage deals worth it?

At the time of writing, the few cashback offers with a mortgage deal do not seem to be worth it as they provide poor value for money when compared with mortgage deals that offer the lowest interest rate with no cashback. However, even though the cashback mortgage deals that we have compared do not provide value for money unless you are likely not to be able to secure a mortgage deal at the average interest rate or higher, this does not mean that viable cashback deals do not exist. Your lender may offer a small cashback amount as part of your mortgage deal without raising the interest rate to the point where your overall costs are significantly increased. That being said, some homebuyers may accept the poor value for money that a cashback mortgage may offer in exchange for the convenience of having access to funds that could pay for essential financial needs.

Pros and cons of cashback mortgage deals

Pros

• Access to cash funds on completion
• Cash may be used to cover unexpected costs
• Value for money if the interest rate you can secure is similar regardless of the cashback

Cons

• Usually increases the overall cost over the mortgage term
• The extra cost of higher interest rates provides little value for money
• Reduces the range of lenders you can choose from

How to find the best mortgage solution

Securing the best mortgage deal can be difficult due to the amount of technical terminology you have to understand and the vast array of mortgage deals to choose from. You should take the time to check that you have the best rates available, as even a small difference can add up to thousands of extra pounds spent unnecessarily. Flexibility can also be key and you may have to consider how long you are tied into a deal, especially if you feel that interest rates are falling and that you would like to remortgage to a better rate sooner to take advantage of this. Searching the market can be difficult but our mortgage rate comparison tool makes it easier as it allows you to search over 90 lenders' mortgage deals based on your specific needs. You can also check our article 'Best mortgage rates in the UK', where we regularly update the best mortgage deals available for a variety of house-buying scenarios.

In the mortgage market, not all mortgage deals are made available to homebuyers directly and some deals will only be available through a mortgage intermediary. This means that the best way to ensure that you have secured the best mortgage deal is to engage the services of a mortgage broker. Not only will your mortgage broker search the market on your behalf, they will also provide advice and guidance on how best to position yourself to secure the mortgage that you need. Most mortgage brokers will help you with your mortgage application and guide you through the process until full completion is achieved, giving you peace of mind and taking some of the stress associated with purchasing a property away from you.

You can find a local mortgage broker using the online directory of financial professionals, Vouchedfor*. It provides listings of mortgage professionals by specialism and lets you peruse customer reviews from others who have used their services. Alternatively, you can contact Habito*, an online mortgage broker service that provides free mortgage advice online and over the phone, and can search mortgage deals from over 90 lenders in the UK.