Cash Back Mortgages

What are cash back mortgages?

Here's a truism. If something looks like it's too good to be true, then it probably is. Have you ever received a phone call saying you've won a free holiday? Or received junk mail telling you you've won a new car? Whilst this seems like great news, usually there'll be strings attached. You may need to go somewhere you get your prize and spend the day being subjected to the hard sell from some timeshare cowboys. Or you may have to join a club, which will end up costing you money.

Some mortgage deals are like this. The lenders recognize that there are costs that you are liable for when you are buying your first home, so they'll try and structure the loan so that your initial repayments are less than the standard variable rate. Or they'll offer money up front to help you out with your costs. This may be helpful at first, but may cost you a large amount in the long run, so the wrong mortgage can be a very expensive mistake. Do your homework first.

The cash back mortgage offers you an amount from, say, £200 up to £1000 as a flat amount, or it may be a percentage of the loan. An example would be when getting offered a variable rate loan at 6.99% with 7% of the loan offered as cash back to you. With a loan of £100,000, this is a not insubstantial sum of £7000, which will come in very useful when buying your new home. However, the deal is actually quite expensive, with the high standard variable rate, and the loan is only available for up to 90% of the value of the home.

With that type of loan, you may also face redemption penalties for six years, which means you are paying for your cash back for 6 years. To change the deal away from the punitive standard variable rate you'll have to pay back a percentage of the mortgage. This includes the whole amount of the cash back in the first year (7%) to 2% in the sixth year, which is £2000 on the above example.

Nowadays, redemption fees are not as readily accepted as before. Big cash back deals will be locked into redemption fees of at least five years, and you should be aware of that. These redemption deals should be understandable, after all without them everyone would get a cash back mortgage then change their mortgage immediately afterwards, which would not make any sense for the lenders.

Should the cash back mortgages tie you in for six years at the variable rate, then you'll probably find that in the long run that a mortgage on a lower rate without cash back for six years will be a better deal.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2009

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