Cashback mortgages are a type of mortgage that offer borrowers the option to receive a lump sum of cashback from the lender upon closing the mortgage deal. This cashback feature can be appealing to homebuyers as it provides them with extra funds that can be used for various purposes, such as covering closing costs, making home improvements, or even bolstering their savings.
These mortgages typically come with a higher interest rate compared to traditional mortgages without cashback offers. The additional interest helps to compensate the lender for providing the upfront cash to the borrower.
Here's how cashback mortgages generally work:
- Loan Amount: Borrowers apply for a mortgage for a specific loan amount, just like with any other mortgage.
- Cashback Percentage: Lenders usually offer a certain percentage of the loan amount as cashback. For instance, if the mortgage amount is $200,000 and the cashback percentage is 3%, the borrower could receive $6,000 in cashback.
- Interest Rate: Cashback mortgages tend to have slightly higher interest rates than regular mortgages. This higher rate helps offset the lender's cost of providing the upfront cashback amount.
- Repayment: The borrower makes regular monthly payments based on the higher interest rate and the loan amount. The cashback amount is not typically factored into the monthly payments.
- Usage of Cashback: Borrowers receive the cashback amount at the time of closing. They can then use this cash for any purpose they choose, whether it's covering closing costs, making home improvements, or addressing other financial needs.
- Long-Term Cost: While the upfront cash can be beneficial, borrowers should consider the long-term cost of the higher interest rate over the life of the mortgage. It's essential to weigh the immediate financial benefit against the potential higher overall cost.
Cashback mortgages can be a suitable option for those who need extra funds when purchasing a home or refinancing their existing mortgage. However, borrowers should carefully evaluate their financial situation, future plans, and the overall cost implications before opting for a cashback mortgage. Comparing different mortgage offers and consulting with financial advisors can help borrowers make an informed decision that aligns with their financial goals.
