Cashback mortgage deals are flooding the market. But should you be tempted by the lure of a rebate?
Useful cash injection or smokescreen for expensive borrowing?
Who doesn’t love a good cashback deal? A few pounds in reward for shopping smart on everything from earrings to electricity.
The rise and rise of the world of cashback means some of us never pay full price for anything, lured by the promise of money in our pockets in return for our shopping history and personal data. Now, even the biggest purchase in our lives can reap rewards with one of the thousands of cashback mortgage deals now available to UK buyers.
So at a crucial (and expensive) point for your finances, is it worth plumping for, or are these products smokescreens for even more expensive long term borrowing?
Money for nothing
Cashback on our financial affairs is no new development, but our insatiable appetite for them is.
MoneySuperMarket reckons the popularity of cashback current accounts is up 100 per cent this tax year, for example, with accounts that simply pay a high rate of interest seeing demand fall by more than 50 per cent in the same period.
In response to such hunger, there are now more than 1,200 cashback mortgage deals on the market, up by more than a quarter in the last year. And for once, some suggest they could be a win-win for house buyers.
“Following the recent base rate rise, many borrowers are starting to look at the cost of their mortgage more closely, so it’s great news that there’s been an increase in the number of deals on the market that offer a cash rebate,” says Charlotte Nelson, finance specialist for Moneyfacts.
“Even better, borrowers are likely to see more cash than they did a year ago, with the average cashback amount having increased by £41 to stand at £409 today.
As a nation though, we’re wary of the promise of a freebie without a catch, and historically, we’ve been right to be suspicious.
“At one point borrowers could find standard variable rate mortgages that tied the borrower in for something like five years with a substantial cashback on completion,” says David Hollingworth of mortgage broker London & Country.
“These essentially offered the discount upfront as cash but rarely worked out to be a better option than the best overall discounted rate. As competition brought the development of better deals for customers this type of cashback became less and less popular and has basically died out.
In today's market, cashback will generally be attached to a more traditional product design, offered as an added incentive. Cashbacks can vary in size with many pitched around the £200-250 level as a way of covering some the costs that may be associated with the mortgage.
“Others however will offer a more substantial cashback which may be designed to offer help with the substantial expense that comes with buying property.”
Nationwide BS offers a £500 cashback to all first time buyers, for example, and West Bromwich BS currently offers a two-year fixed rate at 2.69% to 90% LTV with no fee, free valuation and a £1,000 cashback.
“Cashback can be a useful added incentive but just as a borrower shouldn't be drawn solely to a low headline rate and ignore a large arrangement fee, so they need to make sure that the overall package is right for them,” adds Hollingworth.
“For example at 90% LTV the lowest rate for a two-year fix is from Yorkshire BS at 1.89% with a £995 fee and a £250 cashback. The rate is substantially lower than the West Bromwich BS deal but it's important to compare overall value.”
Here’s why: On a £180,000 mortgage for a £200,000 property, you’ll pay just over £18,000, plus £1,200 in fees and valuation costs for the Yorkshire deal. With £250 in cashback, your total outlay will be a shade over £19,030.
Take up the West Brom loan and the cost will be closer to £20,000 but with nothing to pay in fees and valuation, the £1000 cashback offer means a net cost of £18,796 in the first two years, despite the higher interest rate.
Similarly, while the lowest rate on a five-year fix appears to be TSB’s at 1.74% with a £995 fee, a few rapid fire calculations suggest that on a £200,000 mortgage over a 25-year term, Nationwide’s 1.79% five-year fixed rate with £500 cashback and £999 in fees works out slightly cheaper.
“Buyers can often receive even more of a cashback boost if they are willing to switch current accounts, but should always consider all options first to ensure they get the best deal for them,” adds Nelson.
The only problem is that the consuming demographic most likely to embrace the world of cashback is the one most likely to be excluded here. “Cashback is usually considered an incentive for those with higher loan-to-values,” she adds. “That’s why first-time buyers will be disappointed to find that since the base rate announcement the number of deals with cashback available to them has shrunk by 30%, from 460 products available to those with a 5% or 10% deposit on 1 November to 321 today.”