Recent mortgage Q&A
Cash back mortgages explained
The basic premise of a cash back mortgage is that your mortgage lender will give you a certain amount of cash once your mortgage has been completed. There are two main cash back scheme that are available. The first offers you a small amount of cash back, usually a couple of hundred pounds, which is offered in addition to other specific elements of a mortgage product, such as a specific rate or discounted rate scheme. In these cases the cash back can offer you just a little bit more flexibility in terms of making payments, such as valuations and to put towards legal fees rather than adding everything you can onto the mortgage amount.
The second type of cash back scheme offers customers a much larger cash back amount and is usually linked to a mortgage on a standard variable rate. Depending on the exact scheme you could be given up to 6% of the mortgage amount and you are not limited in terms of what you use this for. You will not generally receive this cash back in time to use it as part of your deposit, but most mortgages allow you to pay off up to 10% of the mortgage each year and so you could potentially use it for this purpose.
There are clear advantages of having a little extra cash when you are moving house as cash flow could be limited during this time.
Watch out for the tie-in period
Despite the attraction of a cash back mortgage, you should make sure you check out all of the details of this type of mortgage as you may find that even with the cash back, you end up paying significantly more in the long term. One particular thing to watch out for, particularly with a mortgage offering large cash back, is the tie in period. For large cash back amounts this could be anything up to around 6 years, which could prove to be expensive if you are on a variable rate and the interest rates go up. You also need to consider that in general the interest rates on a cash back mortgage will be higher than other mortgage products that are available.
Get independent advice
If you are unsure about the costs over time, make use of a financial adviser, many of who offer their time free through estate agents as they work on commission, who will be able to calculate repayment amounts over time so you can then make an informed decision.
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