Outgoings are always high when you buy a home, so the offer of a lump sum cash payment will be gratefully received by most homebuyers. And this is exactly what you will get if you opt for a cashback mortgage.
The mortgage lender gives you a cash lump sum when you take out your mortgage to help with buying costs or to pay for furniture or appliances for you new home. But this cash comes at a cost.
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Cashback mortgages are not magic money making schemes, says James Cotton, mortgage specialist at London & Country mortgage brokers. Lenders are not giving you free money, there are catches to look out for, for example rates are higher and you tend to be tied in to the mortgage for longer than average.
West Bromwich Building Society for example, is offering 6 per cent cashback which works out at a very tempting £9,000 on a £150,000 mortgage. But there are two catches. First the rate at 7.34 per cent variable, which will increase with any rate rises and the second is the redemption penalty which is payable in the first five years, meaning you cant switch your mortgage during that time unless you pay the cash back.
But if money really is tight then a cashback mortgage could be useful if you find the right deal. Cotton explains that cashbacks work out better value if you have a small mortgage. If you have a big mortgage the higher interest rates on these mortgages mean you will rack up higher interest rate payments over time.
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A cashback could also work out better value than taking out a personal loan if you really do need the cash. But you need to do your sums carefully and weigh up all the pros and cons. If interest rates continue to rise, cashback deals may become poor value compared to loans.
Instead of cash you may find other freebies such as TVs, computer equipment or even a free car in the case of West Bromwich Building Society, which carried this offer a couple of years ago. As these deals have a fixed value they can work out good value for borrowers with a small mortgage explains Cotton, but are less worthwhile for borrowers looking for a large loan as the value of the goods will be the same. But dont get dazzled by these freebies and make sure you actually want the goods on offer and that the deal represents good value for your circumstances.
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