Cash Back Mortgages

A cash back mortgage deal involves a lender giving the borrower a lump sum of money either before paying for a new home, or after making the first monthly payment. The amount of cash given depends on the deal. Most lenders will normally give 5% cash back on the amount borrowed; however, there are a few lenders that will give up to 10%.

How Cash Back Mortgages Work

There are two ways a lender can offer a cash back mortgage. A lender may offer a cash back mortgage at a standard variable rate. It can be as high as 6 per cent of the new mortgage amount. It is normally paid out between 2 and 3 weeks after completion of the mortgage agreement. This option makes it difficult to use as a deposit. Another method is a cash back mortgage offered along side another mortgage product such as a fixed rate or discounted rate. This option is usually a small amount. Borrowers often use it to cover mortgage valuation fees or legal costs.

Advantages

Cash back mortgages can be good for those needing extra cash at the beginning of their mortgage to pay for such expenses as moving-in and setting up. Cash back mortgages can also work for first-time buyers who do not have a deposit. Because many lenders will only let you borrow 95 per cent of the value of a property, this means you have to find a 5 per cent deposit. Some lenders will still give you a cash sum before you complete your house purchase, allowing you to use the cash as a deposit.

Disadvantages

Like many loans of this nature, early repayment penalties can be expensive. With cash back mortgages, higher application fees and higher interest rates may be applied. You may have to pay an application fee when arranging your cash back mortgage. Interest rates tend to be higher than other mortgages. Cash back mortgages sometimes has interest charged on it at a higher rate than the rest of the loan. It can also include penalties if the loan is paid-off early.

Considerations

Although Cash Back mortgages offer an obvious initial short term advantage to borrowers in the form of a cash injection, you may be tied into the deal for a number of years. If you decide to move your mortgage to another lender, or repay the entire loan of early, you may have to pay an early repayment charge. You may also have to pay the lenders standard variable rate for the specified period of time. Cash back mortgages remain popular products and may be a suitable option for you, but it is well worth while to consult with a mortgage advisor to discuss all of your options. As with all mortgages, if you default on the loan, you could lose your house.