When you move into a new home you will probably find yourself short of cash for a while. So what if your lender was to offer you a lump sum to go with your mortgage? Nia Williams looks at what cashback mortgages are currently on offer
Outgoings are always high when you buy a home, so the offer of a lump sum cash payment would be gratefully received by most homebuyers. Just imagine how you would feel if someone handed you a few hundred - even a few thousand - pounds. It would be a bit like winning the lottery but not even having to buy a ticket - or choosing numbers. And this is exactly what you would get if you chose a cashback mortgage. Choosing a mortgage linked with a cashback gives you a cash lump sum, tax-free, on completion of your mortgage. And because people naturally like the idea of being given a large sum of money by their lender, these mortgages tend to be popular with homeowners. Compare mortgages They were very popular with lenders as well. A few years ago, before cashbacks were introduced, fixed rates were the most popular type of loan and this led to a price war. Lenders were offering borrowers lower and lower rates which gave them less and less chance to make a profit. In short, the fixed rates lenders were offering were in danger of becoming too popular. Lenders needed a way to attract homebuyers to take out mortgages at their standard variable rates. The cashback was the answer. By giving borrowers a fixed lump sum or a percentage of the loan as a lump sum, lenders offered an attractive incentive to take out one of their mortgages based on a standard variable rate. Instead of the security of knowing exactly how much each mortgage payment would be for a certain period, more and more people opted for the cash up front. It's not hard to see why - this is definitely an advantage to some homeowners. If you have just moved into your new home any cash is welcome - particularly the kind of money some lenders are offering. Quite apart from the expense of all the things you have to pay for during the process of buying a house - legal bills, arrangement fees, a survey, higher lending charge if you are borrowing a certain percentage of the property's cost - you will have just put as much money as you can into the deposit. And then there's the stamp duty! If you are buying your first home or moving from rented accommodation it is likely that you'll need to buy quite a bit of furniture or - at the very least - things like curtains, kitchen equipment and so on. The costs can mount and mount regardless of how well you thought you'd budgeted before you set out to buy a home. As a result, the idea of a considerable sum of money at precisely the time you need it most will be very appealing. Calculate your mortgage repayments here But whereas previously cashbacks were given just on mortgages taken out at the standard variable rate, these days you don't necessarily have to decide between a fixed or discounted rate and a cashback sum. Plenty of cashback deals include a fixed rate or discount as well as a lump sum. All you need to do is decide which is the best deal for you. Choosing which one suits you, or even between different loans from the same lender, will obviously depend on your circumstances. For example one lender may have a umber of cashback deals for you to choose from, although some of these may only be available through brokers. Other cashback offers may depend on certain criteria like the size of your deposit. However, a good deal of the decision making will come down to simple mathematics. To start with you must decide on the type of cashback you want - one based as a percentage of the sum you are borrowing, or simply a cash lump sum. If you decide on a percentage cashback, the amount of money you get as a cashback will be determined by how much you are borrowing. This in turn could be dictated by the size of the deposit you are able to put down. For instance, take two offers from Tipton & Coseley as an example. If you put down a 25 per cent deposit you will receive a cashback of 8 per cent of the value of the advance which is obviously £8,000 on a £100,000 mortgage and £12,000 on a £150,000 mortgage; £16,000 on a £200,000 loan and £20,000 on a £250,000 mortgage. If you only put down a 10 per cent deposit the cashback reduces to 6.5%, equating to £13,000 on a £200,000 loan. According to Network Data's Mortgage Link, there were 573 cashback mortgages on the market offering a fixed amount, down from 594 products back in December. However, despite the reduction in the number, the average amount paid out rose from £267 to £276. As far as the cashbacks given as a percentage of the loan, while the number on offer reduced, again the amount paid out increased from £1,243 to £1,548. This data is based on a £50,000 mortgage. You are likely to find that the interest rate you end up paying with a cashback mortgage is higher than offers with no cashback. You may even find that the cashback mortgage actually has a higher rate of interest than the standard variable rate normally offered by that lender. Again you have to balance the obvious extra cost of paying more interest against the cashback you are being offered. Some lenders give their customers cash sums for very specific purposes. This is not strictly a cashback but can help you deal with some of the bills you will inevitably encounter. For example, some lenders will offer a set sum to pay your legal fees. However, the money never actually passes through your hands. The lender will send the money straight to your solicitor so you cannot spend it on anything else. You must also remember that, having handed out cashbacks, your lender will expect to get something in return. The cash comes at a cost and they are not magic money making schemes. Lenders are not giving you free money, there are catches to look out for, for example rates are higher and you tend to be tied in to the mortgage for longer than average. So if you decide to pay off your loan early or move home or remortgage to another lender, you are likely to incur early redemption penalties. This will either be a number of months' interest or the value of the cashback you received A cashback could work out better value than taking out a personal loan if you really do need the cash. But you need to do your sums carefully and weigh up all the pros and cons. Cashback deals may be poor value compared to loans, depending on your personal circumstances and how much you want back. Instead of cash you may find you are offered other freebies such as TVs, computer equipment or even a free car in the case of West Bromwich Building Society, which carried this offer a few years ago. As these deals have a fixed value they can work out good value for borrowers with a small mortgage but are less worthwhile for borrowers looking for a large loan as the value of the goods will be the same. But don't get dazzled by these freebies and make sure you actually want the goods on offer and that the deal represents good value for your circumstances. So, make sure you choose a mortgage that won't leave you wishing you'd gone for a lender with a lower mortgage offer rather than the one with the most lucrative cashback deal. Part of the enjoyment of buying a new home is being able to style and decorate it as you wish. Yet, after moving in it is likely that you'll still be smarting from all the bills you've had to pay just to move into the house - and you may still need to buy furniture. The point about cashbacks is that you get a hefty sum of money at a time when you probably need it the most.
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Date: 30th, January, 2008 |
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