MORTGAGES with cash incentives can be great for first-time buyers – but checking the fine print is vital as they may not be as they seem.
Competition is hotting up in the mortgage market as lenders compete for customers.
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Along with better rates, which mean lower monthly repayments, lenders are also looking at other ways to attract new customers.
One way is by offering cashback as part of deal incentives for first-time buyers.
The amount you can get varies, but it can be anywhere from £200 and up to £2,000.
But experts are urging buyers to check the small print on all potential mortgage deals, because these incentives could cause you to pay more in the long term.
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David Hollingworth, an associated director at L&C Mortgages, said: “Just as it’s important not to focus solely on the interest rate of a mortgage, it’s also best not to be drawn to a deal simply because of the cashback.
“The key is to look at the best overall value, factoring in the total cost of the deal over the deal period.”
Borrowers with just a 5% or 10% deposit can find as much as £2,000 cashback on some deals, such as with Yorkshire Building Society or Accord Mortgages, according to Moneyfacts.
Accord Mortgages is currently offering 5.21% on a five-year fixed rate first-time buyer loan with a maximum 90% LTV with a whopping £2,000 cashback.
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But a five-year fixed rate mortgage with Accord that doesn’t offer cash back, or any other incentives, has an interest rate of 4.62%.
Based on a mortgage term of 20 years for a property worth £250,000, the higher interest rate would add £4,870 to your mortgage bill over five years.
Meanwhile, HSBC has launched a brand new deal, offering a 4.99% five-year fixed rate on a mortgage with a maximum 95% LTV with cashback worth £1,000.
This is the only five-year fix offered by HSBC for first-time buyers with a 5% deposit.
Below, we explain when you should consider a cashback mortgage and the key details to look out for before you sign up.
I’m a first-time buyer – should I consider a cashback mortgage?
A cashback mortgage is when a lender gives you a cash lump sum, as an incentive to take out your mortgage with them.
The cash is usually paid on completion and gets sent to the solicitor with the mortgage funds.
In most cases, the solicitor takes their bill out of these funds, so the cash will in effect end up going towards those fees.
And with the average legal fees of buying a house coming in at between £850 and £1,500, this can be a big help.
Nick Mendes, from mortgage advisers John Charcol, said lenders know this is a “huge incentive” they can use to “entice” new customers.
Lenders have been known to free legal advice as an incentive too, but Nick said cashback can actually give you more freedom when it comes to getting a solicitor.
He said: “Taking up the option of free legals means the lender will choose a solicitor for you, meaning you have less control.
“These types of conveyances work on volume so it’s not uncommon for clients to express dissatisfaction in the service and regret in not opting for a solicitor that’s easily accessible
“The positive of opting for cash back is that you can choose whichever solicitor you like.”
Despite this perk, it’s still important to make sure that you’re choosing the mortgage product that’s most suited to you – and not to base a decision on the cashback offering alone.
David from L&C Mortgages said: “The key is to look at the best overall value, factoring in the total cost of the deal over the deal period.
“Cashback deals can often carry higher rates but that could work well, especially for those with smaller mortgages.
“Reduced fees and bigger incentives like cashback could make it worth paying a slightly higher rate but you need to get the sums right to get the best deal.”
Essentially, a deal that doesn’t come with cashback but has a lower rate is likely to be more beneficial overall.
A good mortgage adviser can help discuss the different mortgages available for your situation.
How to get the best mortgage deal for you
Getting the best rate on your mortgage can depend on the rates available at the time.
Unfortunately there’s no way to predict what will happen to rates, and whether they will go up or down in future. But there are several ways to land the best deal available for you.
Many wait until their existing loan has run its course before signing up to a new offer.
But if you’re nearing the end of a fixed deal it’s worth looking now as you can lock in current deals sometimes up to six months before your current one ends.
You’re not locked in though, so if you find a better deal you can always cancel and get the new one – and you can do that as many times as you want.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio has changed this could also give you access to better rates than before.
A change to your credit score or a better salary could also help you access better rates.
If you’re on a standard variable rate (SVR) fixed and tracker deals are likely to be cheaper, so it’s worth looking at what’s out there.
You usually end up on an SVR if your fixed deal ends and you don’t choose a new one.
These can be over 8% and are among the most expensive options out there.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare for you, but you may have to pay for this service.
It could cost a couple of hundred pounds but it might save you thousands on your mortgage overall.
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You’ll also need to factor in fees for the mortgage, though some have no fees at all.
Or you can add it to the cost of the mortgage, but beware that means you’ll pay interest on it and so will cost more in the long term.
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