Our Comprehensive Guide To Cash-back Mortgages

Len Burgess[1]

Len Burgess

Money Savings Advice cash-back mortgages

Finding the right mortgage means considering every mortgage deal. One option is a cash-back mortgage, giving you accessible cash that you can use straight away once your mortgage is processed.

What Is a Cash-Back Mortgage?

With a cash-back mortgage, you’ll get a lump sum payment once your mortgage is completed, to use as you see fit. The completion date is the day that the money is transferred and you get the keys to your new property.

There are benefits to choosing a cash-back mortgage, though they’re not amongst the most common types of mortgage that people apply for.

Read on to learn more about a cash-back mortgage, to decide if it’s the right choice for you.

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How Does A Cash-back Mortgage Work?

With a cash-back mortgage, you’ll receive a lump sum payment when your mortgage reaches completion. Different mortgage deals will have different cash-back amounts, though most typically offer something between £250 and £1,000 in one payment. Your cash-back deal may be a specific amount or a percentage of the money you’ve borrowed.

Your cash-back can be spent on anything you like. Many people choose to put the money into savings, in case it’s needed later in the mortgage term. That cash injection can also help with the costs of new furniture you’ll need.

There are no limits to how you can choose to spend your mortgage cash-back.

Benefits Of A Cash-back Mortgage

Many people put all their spare money into getting their new home. That’s particularly true if you’re a first-time buyer. You might have saved every penny towards your deposit, leaving very little for a rainy day. With cash-back, you’ll have a little bit of money to spend on other things you might need.

You might decide to put your cash back into a savings account. It’s peace of mind, in case you find that you’re low on funds in a future month. Alternatively, you might want to spend your cash-back on furniture for your new home.

When buying a new house, you should always expect the unexpected. Once you’ve moved in, you might see something that you hadn’t noticed when you viewed it. Perhaps you’ll need to make repairs that you hadn’t prepared to be making.

With lump-sum cash-back, repair and maintenance projects don’t need to be such bad news.

Drawbacks Of A Cash-back Mortgage

Mortgage providers will give you cash-back for nothing. Your mortgage will be more expensive, to cover the costs of the money that you’ve taken at the start of your mortgage term.

Usually, cash-back mortgages have a higher interest rate than others. You don’t get money for nothing, and in fact, might end up paying more overall than if you skipped the cash-back completely.

Relative to your entire mortgage, the cash-back is a tiny amount. If you’re charged a higher interest rate, it’s likely that you’ll give much more money back to your lender. Before you apply for a cash-back mortgage, consider the true cost of this deal.

Who Are Cash-back Mortgages For?

Anyone can apply for a cash-back mortgage, though they’re usually marketed towards, and available to, first time buyers and younger homeowners. This is because, with limited experience, these are the buyers most likely to need a bit of extra cash to get started.

It’s important not to be swept in by instant gratification. Cash-back on completion sounds like a great idea, but you’ll need to decide if it’s worth raised interest rates for the duration of your mortgage term.

How Widely Available Are Cash-back Mortgages?

Cash-back mortgage have been found to make up roughly a quarter of fixed-rate mortgage deals for first-time buyers. These deals are even more widely available if your deposit’s on the small side.

If you’ve only got a 5% deposit, you’re even more likely to be offered a cash-back mortgage deal than someone that’s got 10% saved up. These are mortgages most commonly offered to applicants already low on funds.

With a cash-back mortgage, you’re unlikely to get market-leading interest rates. The short-term gain must come at a cost, and first-time buyers are most likely to focus on immediate benefits.

Staying Savvy With Cash-back Mortgage Deals

If you don’t want to be taken in by a cash-back offer you don’t need, it’s usually wise to steer clear of this type of deal. If you can get by without an extra £500, you’ll likely be rewarded for your willpower with lower mortgage payments every month.

Take time to compare the costs of cash-back mortgages and other fixed-rate products.

How Much Higher Is The Interest Rate For The Mortgage That Has A Cash-back Deal?

If the difference is small, you might be happy to pay a little more each month in exchange for an up-front lump sum. If the difference is larger, take time to decide if you really need the money in advance.

A cash-back mortgage could be a lifeline if you’ve invested every spare bit of change into getting on the property ladder. If you don’t need it, there are no real benefits to taking the cash-back option.

Examples of how a cash-back mortgage impacts your monthly repayments

The below example is based on a £125,000 mortgage over 25 years, both with NatWest using typical rates.

Mortgage Type Cash-back Received Interest Rate Monthly Repayment Total Interest Paid
Fixed-Rate £0.00 1.79% £517 £30,055
Cash-Back £250 1.91 £525 £32,364

Money Savings Advice compiled numbers

You can see why it makes more financial sense to opt for a mortgage without cash-back if you can. Yes, you’ll get that £250 upfront, but you’d also pay back £8 a month more, which means in less than three years you’ll have repaid that £250. And over the course of the whole mortgage term, you’ll end up paying more than £2,000 extra in interest.

Cash-back Mortgage Conditions

Some mortgage providers set extra conditions that you’ll need to meet to get their cash back. Always check that you’re meeting the lender’s requirements. A bank might ask that you hold a current account with them, or another lender might require you to wait a few months before you get your lump sum cash-back payout.

Always check the term and conditions so that you know what to expect.

Finding The Right Cash-back Mortgage

If you’ve decided that a cash-back mortgage is the right choice for you, spend some time weighing up the lump sum payments and the interest rate.

Would you exchange higher interest charges for a larger cash payout, or are smaller monthly payments worth taking a reduced amount of cash-back? These two things don’t always balance each other out, so you might find that the best cash-back deal also has a lower interest rate than a mortgage with another provider.

Cash-back Mortgage Term Lengths

You’re likely to be locked into your cash-back mortgage for anything from 2-10 years, with high fees and charges if you decide that you want to break out a bit early. For the duration of your mortgage term, you’ll need to be satisfied that you made the most suitable choice.

Regretting your mortgage choice causes negative feelings that could have a long-term impact, so it’s especially important not to be swept up by promises of mortgage cash-back. Only choose a cash-back mortgage if the benefits do outweigh the drawbacks.

How Can Money Savings Advice Help You With A Mortgage?

Here at Money Savings Advice, we have partnered with some of the UK’s leading mortgage brokers. They have already helped thousands of people get the best mortgage deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a mortgage unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.


Money Savings Advice Author Len Burgess

Len Burgess

Len Burgess is a professional financial writer who over the last five years has written hundreds of articles for all financial sectors. Len founded Money Savings Advice with the aim of helping consumers navigate their way around the financial world by providing easy to understand financial information and matching consumers with the best financial advisor based on their personal information.

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