Cashback Mortgages

The cashback mortgage was very popular during the 1990's.

Initially, the purpose of the cashback was to enable the buyers - usually first time buyers, to furnish the property and make improvements. Very quickly buyers realised the possibility of using the cashback as a deposit. Lenders generally discouraged this approach as a) it reduced the fees they could collect from 100% mortgages, and b) they just didn't like it. Partly for these reasons, the cashback was often sent to the borrowers a few weeks after completion.

One lender decided to offer a 5% cashback on completion, paving the way for those who had no deposit to obtain a 95% mortgage. Naturally, this was very popular with first time buyers in particular, and the lender concerned, captured a big slice of the market. Before long 5% cashback on completion mortgages were as common as an estate agent in a Porche.

The two drawbacks with cashback mortgages are:

The interest rate offered is usually the lenders Standard Variable Rate meaning that monthly payments are higher. Often, this will mean that you are paying 1.5% - 2% above a discounted rate.

Redemption penalties are often 5 years for a 5% Cashback Mortgage, and I've seen them as high as 7 years. This means that you will be stuck on the lenders Standard Variable Rate for a long time. The penalty for paying off your mortgage within this period is usually the return of the cashback that you received.