Cashback Mortgages

A cashback mortgage is a specialised type of standard repayment or interest-only mortgage, which pays out a cash lump sum after your first repayment or upon completion of the mortgage, that is, when the mortgage has been arranged. The size of the cash amount largely depends on the type of interest rate applied to the loan. Typically, if the interest rate is the lender's standard variable rate, the cash amount can be up to six percent of the mortgage amount. If the interest rate is fixed or discounted, the cash amount is usually smaller: perhaps only a few hundred pounds.

The cash amount can usually be spent in any way you wish, but some lenders insist that you use it for a specific purpose: for example, to pay the legal fees associated with buying the property. In general, the larger the cash amount, the more stringent the lender will be. For example, if you are given a very large cash sum, you may not be entitled to repay your mortgage early or remortgage without paying back the cash amount in full or paying a penalty fine.

The interest rates which apply to cashback mortgages are generally higher than standard mortgages. This is because the lender wishes to recover the cash sum by charging you more interest over the term of your mortgage. Usually, the larger the cashback amount, the higher the interest rate, which means that although you benefit from a cash sum, your mortgage will cost you more in the long run. Often, cashback is offered alongside a standard variable, or fixed rate mortgage.

There are disadvantages when opting for a cashback mortgage. Apart from the larger interest charges, which increase the overall cost of the mortgage, you are often 'tied-in' to a mortgage that does not offer you the best deal. Conversely, if you are a first-time buyer, a cash amount can be very useful for purchasing furniture, paying legal fees or stamp duty, which you may not be able to afford otherwise. Since the cash amount is usually paid several weeks after your mortgage is completed, it cannot usually be used to pay the deposit on your property. Cashback mortgages usually carry large application fees, which could further reduce the benefit of this type of mortgage.