Cashback mortgages involve the mortgage provider paying a lump sum to you the borrower at the completion of your mortgage term, either as a set amount or as a percentage of the amount paid.
Disadvantages to Cash Back mortgages
Everyone likes to be given a freebie and Cash Back mortgages would appear on the face of it to be an irresistible lure when choosing a mortgage. However, most people will realise that lenders donít give away money for nothing and there has to be a reason behind any Cash Back offer. Mortgage lending is a business built on money, percentage points and return on investment so the Cash Back feature has to fit into that for the lender or they wouldnít be doing it.
Gaining new customers is always the most expensive part of any business and for mortgage providers the best business is to keep a borrower with them for the full term of their mortgage. As in most businesses churn has a knock-on cost to the provider. Cash Back mortgages typically come with tie-ins which means there are penalty clauses associated with early redemption or a change in lender.
As a promotional tool the Cash Back mortgage has a positive impact so lenders may use it by tying their offer to their least popular and least competitive product in an attempt to promote that mortgage but also to attract in new customers.
Although first time buyers may need cash for all their associated expenses the usual channels such as a bank loan along with a better rate mortgage that isnít tied to a Cash Back could prove to be more cost effective in the long run.
Limited Mortgage Choice
The Cash Back mortgage does limit choice because it wonít be offered on every mortgage that a lender has on offer. The best rate mortgages will usually not need the added incentive of a Cash Back feature to make them popular as the market will identify them anyway.
Like any short term offer the Cash Back advantage will have been used long before the bulk of the mortgage has been addressed and the initial attraction of the Cash Back can mask the real picture if borrowers donít investigate fully.