It sounds pretty tasty, doesn't it, getting £8,000 cashback when you take out a new home loan? Aha, as always, there's a nasty sting in the tail!
One thing that we're always banging on about here at the Fool is not to practise 'mortgage monogamy'. Your home loan - if you have one - will be one of your biggest financial commitments, so you need to keep it on its toes.
More and more homeowners are catching on to the idea of switching mortgages for a better deal. This can be by winning better deals from their existing lenders, or switching lenders to take advantage of fierce competition for customers. For the full picture, read the Fool's guide to re-mortgaging.
However, you need to be careful when choosing a new loan (you can find out about different types of mortgage here). For example, unless you really need the money, steer clear of cashback mortgages. With a cashback mortgage, you receive a lump sum upfront, in return for agreeing to be locked in to a particular rate for a pre-set period. And it's this lock-in that's the problem, because it can cost you a mint. Here's a practical example:
According to the December issue of Moneyfacts, Tipton & Coseley BS offers 8% cashback to new mortgage borrowers, with a maximum rebate of £20k. So, with a £100,000 interest-only mortgage, you'd receive £8,000 when your loan begins. Lovely!
However, you face hefty penalties if you pay off this mortgage or switch lenders at any time in the first six years of your loan. That's a big handicap, because you're locked in to the society's standard variable rate throughout that time.
Tipton & Coseley's current standard variable rate is 5.74%, which is pretty similar to the pricey rates charged by the UK's biggest lenders. It's also way higher than the UK's cheapest SVR, from the small-but-beautiful Hinkley & Rugby BS: 4.09% with no early settlement penalties.
So, with a Tipton & Coseley cashback mortgage, you'd pay around 1.65% a year more than a borrower on Hinkley & Rugby's low rate - for six years. On the above loan, that adds up to an extra 9.9%, or £9,900, which explains where your cashback comes from!
So, unless you desperately need money to furnish or redevelop your home, give cashback mortgages a miss. As my American uncle would say, they're "short-term cherries, but long-term lemons!"
Check out the offers in our Mortgage Centre | Good, Bad And Ugly Mortgages | How To Choose A Mortgage | How To Measure Up Mortgages.
