Homebuyers are being cautioned against being dazzled by mortgage cashback incentives that promise as much as £2,000 but may ultimately prove more costly for borrowers over time.
Which? Highlights Nationwide Deal
Which? has highlighted a mortgage from Nationwide Building Society as a worthwhile cashback proposition, with the building society providing £500 to remortgage clients on a two-year fixed-rate mortgage at 4.74%. Nevertheless, the consumer watchdog warns that borrowers should see past the immediate cash incentive and meticulously assess interest rates and charges before committing.
Rise of Cashback Mortgages
Cashback mortgages have grown progressively prevalent as lenders compete for custom in a marketplace where fixed-rate products remain considerably more expensive than they were at the year's outset. Research by Which? of Moneyfacts figures revealed that 35% of residential mortgages now feature some type of cashback incentive.
The proportion increases markedly amongst so-called green mortgages, with 96% of products targeted at energy-efficient properties providing cashback rewards.
Largest Incentives for First-Time Buyers
The largest incentives are usually directed towards first-time buyers and home movers, with certain lenders providing up to £2,000. Remortgage clients typically receive smaller rewards, though they have the broadest selection of cashback offers.
Consumer champion Which? identified several fee-free mortgage products currently available, with certain lenders providing significant cashback offers to entice borrowers. Nationwide Building Society is presenting a rate of 4.74% together with £500 cashback, while HSBC is supplying £1,500 cashback with a 5.37% rate.
Among the most attractive propositions are those from Yorkshire Building Society and West Brom Building Society, both of which feature £2,000 cashback, with rates of 5.42% and 5.67% respectively. Meanwhile, Skipton Building Society is presenting a 5.84% rate and £1,000 cashback, offering borrowers various choices to help counterbalance the expense of relocating or remortgaging.
Hidden Costs of Cashback
Despite the appeal of obtaining cash back from a lender, Which? discovered many products may not constitute the saving they initially seem. Its research revealed that 44% of mortgages providing cashback of at least £500 also imposed upfront charges that surpassed the cashback sum being offered. In reality, many borrowers could find themselves paying more money in charges than they receive back as an incentive.
The consumer organisation also highlights that a mortgage with a marginally higher interest rate but no arrangement charge can occasionally prove more economical overall than a lower-rate product carrying a substantial upfront fee.
Example: Fee-Free vs. Low Rate
Using an illustration of a £250,000 mortgage over 25 years, Which? worked out that the monthly repayment variance between a rate of 5% and 5.2% is approximately £30. This means a fee-free mortgage at 5.2% could leave a borrower approximately £280 better off over a two-year fixed term compared to a 5% mortgage that comes with a £999 arrangement fee.
Over a lengthier five-year fixed deal, however, the lower interest rate would typically prove to be the more worthwhile option.
Advice for Borrowers
These findings emerge as lenders continue to battle fiercely for mortgage customers, amid growing expectations that borrowing costs could steadily decline should further interest rate reductions come to fruition. For those weighing up rival deals, Which? advises that cashback should be treated as an added perk rather than the primary deciding factor, with the total cost of the mortgage remaining the single most crucial consideration.
