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What Are Cashback Mortgages - and How Do They Work?

Is a cashback mortgage the ideal product to support your new property purchase? Let's find out with the Revolution guide to the details of how cashback mortgages work.

What Are Cashback Mortgages - and How Do They Work?

Cashback mortgages are an option that is offered by many UK lenders - but the main problem can be working out whether this sort of mortgage is right for you, and which lender to apply to.

The Revolution Brokers team regularly supports clients seeking a cashback mortgage who have been turned down due to a low credit score, or due to variable income streams.

Let's explain how cashback mortgage work, whom they're best for, and how to establish whether you're getting a good deal. For more advice from the independent mortgage experts, contact Revolution Brokers on 0330 304 3040, or email the team at [email protected].

What are Cashback Mortgages and How do they Work?

In essence, a cashback mortgage gives you an incentive to choose this product, with a cash payback. You can choose between multiple different types of offer, each of which will differ with the lender, and the incentives available.

There are also terms and conditions about the cashback incentive, so it's vital to understand how this impacts your overall costs.

Usually, you get the cashback when the mortgage completes. Your lender must let you know what the cashback value will be, when it will be released, and what the conditions are.

In some cases, you get the cash as a lump sum via bank transfer, and in others, it is sent to your solicitor and used to cover their fees.

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Based On Your Yearly Income, You May Be Able To Borrow

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Most lenders will let you borrow 4.5 times your annual salary so, as long as you have a standard 10% deposit, you should be able to borrow this much.

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Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.

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Lenders usually cap the amount they lend at 5.5 times your salary, so it’s unlikely you’ll be able to borrow more than this.

What are the Advantages of Cashback Mortgages?

There are both pros and cons to any mortgage product - let's run through the main benefits, and the pitfalls to be aware of:

Cashback mortgage advantages

  • Incentives can be used for moving or arrangement fees.
  • Cashback is sometimes available to use for any of your costs.
  • In some cases, the incentive will cover your legal fees.

Cashback mortgage pitfalls:

  • You might be charged a penalty if you pay back your mortgage early.
  • There are limits on over-payments in your introductory period - usually two to five years.
  • If you remortgage, you might be charged a value that will reduce your cashback.

What Value Cashback Can I Get Through my Mortgage?

Typically, the cashback on offer ranges from £200 to £1,000, but that all depends on what the lender is offering.

The amount of cashback depends on:

  • Other incentives involved in the mortgage product.
  • Whether you are a first-time buyer or existing homeowners.
  • If you are remortgaging or taking out a purchase mortgage.
  • Whether you are already a client of the lending bank.

Which UK Lenders Offer the Best Cashback Mortgage Deals?

There are lots of different offers, and new products come onto the market regularly.

The best way to find an excellent cashback mortgage deal is to consult an independent broker who has access to every arrangement, from every lender on the market.

Is it Best to Use a Broker if I am Looking for a Cashback Mortgage?

A broker is invaluable in making sure you get the best cashback deal and are applying to lenders who will be in a position to approve your application.

Each lender has its own criteria, which will dictate whether they can offer to lend, including criteria such as:

As your broker, Revolution compares each deal on its own merit, considering factors including:

  • What interest rate is offered, and whether it is the most competitive rate available.
  • How valuable the introductory offers are and how long they last.
  • Whether there are early repayment penalties to factor in.
  • How much cashback is on offer and whether it suits your purposes?

What Interest Rates are Payable on a Cashback Mortgage?

There isn't a set rate at which a cashback mortgage is charged. A lot depends on whether you have a fixed rate interest period, and if so for how many years you are locked into that interest rate.

Variable and tracker mortgages will charge different interest rates over time, depending on the base rate, so there are risks and rewards to analyse in both options.

It is also essential to consider what the total interest will be over the term of the mortgage, compared to how much cashback is being offered on completion.

In some cases, the interest rates make the mortgage fees above the cashback; so another product would be more cost-effective.

The below table compares four different cashback mortgage products to demonstrate how the value of cashback and the rate of interest linked with that offer will impact your monthly repayments and total mortgage cost.

This example is based on a property purchase of £200,000:

 

Cashback offer

Fixed interest rate

Monthly repayment

Annual repayment

Total repayment

Product one

£1,000

2.5%

£897

£10,764

£269,100

Product two

£750

2.4%

£887

£10,644

£266,100

Product three

£500

2.3%

£877

£10,524

£263,100

Product four

£250

2.1%

£867

£10,404

£260,100

Why is it Essential to Compare Cashback Mortgage Rates?

As the above example shows, if you choose the best cashback offer in terms of monetary value, you may end up paying back several thousand pounds more over the lifetime of the mortgage.

Therefore, it's vital to think about what interest rate is being charged, and what the annual and total repayments costs will be.

Revolution can help compare mortgages on a like-for-like basis so you can make an informed choice about which product is most affordable.

Can I Get a Cashback Mortgage as a First Time Buyer?

You can, yes, and there are specific first-time buyer cashback mortgages designed to make it more affordable to purchase your first property.

If you are buying with a partner, you must both be first time buyers to be eligible for a cashback mortgage offered to this type of borrower.

Is There a Maximum I Can Borrow on a Cashback Mortgage as a First Time Buyer?

Generally, a first-time buyer cashback mortgage will be up to 85% Loan to Value - meaning you need a 15% deposit.

There are products at 90% and even 95%, although eligibility depends on the lender and which criteria they require you to meet.

The LTV you are offered depends on what sort of property you are buying, your income and employment stability, and meeting other criteria.

What Deposit Do I Need to Take Out a Cashback Mortgage?

Some niche cashback mortgages require zero deposit - generally, though, you will need at least a 5% or 10% deposit for any cashback mortgage.

Cashback mortgages are more common with a deposit of 15% up to around 25%.

Can Anybody Apply for a Cashback Mortgage?

While you can apply, it is essential to know that you meet the lender eligibility criteria beforehand, to avoid rejected mortgage applications that can have a negative impact on your credit score.

Lenders will look at several different factors to decide whether they can offer a cashback mortgage:

  • How much you earn.
  • Your type of employment.
  • Credit scores and ratings.
  • Your age.
  • What property you wish to buy.

You can potentially port your mortgage to a new property, although it's vital to consult an independent broker before doing so.

Can I Get a Cashback Mortgage with Bad Credit?

Having adverse-credit makes you a higher risk applicant, and so some lenders will not be able to help.

However, mortgage advisors works with a vast network of lenders, including bad credit specialists, so there is usually a deal out there.

What Mortgage Can I Borrow on a Cashback Offer?

Lenders use your income to decide on the maximum they can lend you. Typically, that is based on 4.5 times your annual income, although some lenders can offer up to five or even six times your salary if you meet their other criteria.

The lender will need to know whether you are employed or self-employed and whether your income includes variables such as bonuses, overtime and commissions.

Each lender will have a different policy as to how they treat these types of income, as well as other revenue such as benefits. Therefore it's essential to use a whole-of-market broker to ensure you apply to a lender that will be able to approve your application.

Are There Cashback Mortgages for Retired People?

If you are retired, or approaching retirement age, you might find that mainstream lenders and high street banks are reluctant to lend to you.

Many banks have a maximum age of 75 or 85, although niche lenders may have no upper limit at all.

Can I Use a Cashback Mortgage to Buy a Rental Property?

You can, although you'll usually need a 25% deposit to purchase a buy to let property with a cashback mortgage.

Some lenders can accept smaller deposits of 20% or even 15%, so it all depends on the lender and how closely you meet their lending terms.

Can I Use a Cashback Mortgage to Buy a Second Home?

Yes, there are no stipulations that a cashback mortgage can only be used for a primary residence.

However, it's worth bearing in mind that affordability criteria will be stricter, as with any second home mortgage. The lender will need to be comfortable that you can afford to keep up with both repayments on your first and second homes.

Where Can I Get the Lowest Rates on Cashback Mortgages?

It can be difficult to compare products directly or to know which lenders offer the best cashback mortgages without having access to off-market products, as many niche mortgages are provided only through accredited brokers.

Likewise, online rates tables are useful, but not comprehensive since these tend to be geared towards paid advertisements, rather than an independent view of the best options on the market.

The ideal way to find the most attractive deals is to consult an experienced broker who can offer unbiased advice on which products offer the best value for money.

How Do Lenders Calculate the Rates on a Cashback Mortgage?

Your mortgage offer will depend on several criteria, which the lender will assess to decide what they can offer. These include:

  • Credit history - if you have bad credit, you may find that some lenders cannot accept your application. Bad credit lenders can usually help, and a lot depends on when the issues occurred, and how serious they were.
  • Your deposit - the higher your deposit, the lower risk the mortgage, and the better an interest rate you will be offered.
  • Income - stable, permanent PAYE employment is the lowest-risk form of income, and different lenders will use their own calculations when working out the maximum mortgage, depending on your job and type of income.
  • Age - Some lenders cap mortgage lending at specific ages, and so an independent broker can recommend the right lenders to apply to.
  • What property you wish to buy - if the home is non-standard, you may need a specialist lender with experience lending against that type of property.

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