Cash back mortgages do exactly what they say on the label by giving the borrower a lump sum cash back on completion of the mortgage. The specified sum will be paid to the borrower usually within 3 weeks of the mortgage being issued. Cash backs can vary hugely in amounts paid out as can be applied to different kinds of mortgage products.
Borrowers can take advantage of these cash backs to help with the initial purchase costs of the property, or with the associated costs of establishing a new home such as purchasing furniture. However the best use of a cash back received is to use it towards paying off the equivalent amount on the mortgage, but this is really just applicable to some of the high cash backs which can be around 6% of the loan value.
Borrowers should not be tempted by the glittering allure of cash unless the total mortgage product is the best deal available to them. Typically the cash backs offered are much higher on mortgages which carry the standard variable rate, and much lower on special fixed rate deals. Some of the fixed rate deals carry very high arrangement fees but offer free valuations, whilst other offers have lower arrangement fees or call them by another name, but charge for the valuation.
If we look at some examples of current cash back mortgages on offer there is a huge variation. The Alliance and Leicester have a 4 year fixed rate mortgage available at 2.99%, which then reverts to 4.24 for the term of the loan. The cash back on offer is just £200 but there is a fee free valuation. The arrangement fee is a massive £3000 though. In such an instance the cash back would not cover the arrangement fee so it would be advisable to pay it upfront rather than having it added to the mortgage loan to accrue interest.
This compares to the Abbey cash back mortgage which offers a fixed rate of 2.65% for 2 years then reverts to 4.24% for the term of the mortgage. Again there is a fee free valuation and the cash back on offer is £250. However the arrangement fee is far lower at £1495. To accurately compare which is the better deal for you mortgage calculators can help or you can take professional advice.
These cash back deals can be compared to that of the Woolwich which offers a 3% cash back equivalent to £4,500 on a loan of £150,000. The mortgage is on a standard variable rate of 5.69%. The fees are much lower however at £535 for fee booking and the valuation. Penalties apply to those who change mortgage products within a subscribed period which can entail paying a penalty fee or repaying the cash back sum.
There are a lot of considerations which should be taken into account before deciding if a cash back mortgage offers the best deal for you. You should consider the overall cost of the mortgage including fees, and if you prefer to pay for the security of a fixed rate offer or are happy to go along with the variable rate. Although cash back mortgages offer temptation be sure to check that the overall product is the most viable one for your circumstances.